Stock of Echo Global Logistics, Inc. (NASDAQ: ECHO) recently showed weakness, but the financial outlook looks correct: is the market wrong?

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It’s hard to get excited after looking at the recent performance of Echo Global Logistics (NASDAQ: ECHO), as its stock has fallen 10% in the past month. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we have decided to study the ROE of Echo Global Logistics in this article.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In simpler terms, it measures a company’s profitability relative to equity.

See our latest review for Echo Global Logistics

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

Thus, based on the above formula, the ROE of Echo Global Logistics is:

7.0% = US $ 29 million ÷ US $ 412 million (based on the last twelve months to March 2021).

“Return” refers to a company’s profits over the past year. Another way of thinking is that for every dollar of equity, the company was able to make $ 0.07 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess how much profit the company is reinvesting or “holding back” for future growth, which then gives us an idea of ​​the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Echo Global Logistics profit growth and 7.0% ROE

At first glance, the ROE of Echo Global Logistics does not look so attractive. A quick follow-up study shows that the company’s ROE also does not compare favorably to the industry average of 13%. Despite this, Echo Global Logistics has been able to significantly increase its bottom line, at a rate of 23% over the past five years. Therefore, there could be other reasons behind this growth. For example, the business has a low payout ratio or is managed efficiently.

Then, comparing with the growth in net income of the industry, we found that the growth of Echo Global Logistics is quite high compared to the industry average growth of 7.2% during the same period. , which is great to see.

NasdaqGS: ECHO Past Profit Growth June 19, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Is ECHO correctly valued? This intrinsic business value infographic has everything you need to know.

Is Echo Global Logistics Efficiently Using Its Retained Earnings?

Conclusion

All in all, it seems that Echo Global Logistics has positive aspects for its business. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its business. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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