Are Robust Financials Driving The Recent Rally In Covenant Logistics Group, Inc.'s (NASDAQ:CVLG) Stock?

Covenant Logistics Group's (NASDAQ:CVLG) stock is up by a considerable 26% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Covenant Logistics Group's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Covenant Logistics Group

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Covenant Logistics Group is:

30% = US$114m ÷ US$380m (Based on the trailing twelve months to September 2022).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.30.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Covenant Logistics Group's Earnings Growth And 30% ROE

Firstly, we acknowledge that Covenant Logistics Group has a significantly high ROE. Even when compared to the industry average of 26% the company's ROE is pretty decent. So, Covenant Logistics Group's moderate 7.7% growth over the past five years was probably backed by the high ROE.

Next, on comparing Covenant Logistics Group's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 8.5% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is CVLG worth today? The intrinsic value infographic in our free research report helps visualize whether CVLG is currently mispriced by the market.

Is Covenant Logistics Group Using Its Retained Earnings Effectively?

In Covenant Logistics Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 2.5% (or a retention ratio of 97%), which suggests that the company is investing most of its profits to grow its business.

While Covenant Logistics Group has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

In total, we are pretty happy with Covenant Logistics Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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