Coca-Cola Consolidated's (NASDAQ:COKE) stock is up by a considerable 18% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Coca-Cola Consolidated's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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 Coca-Cola Consolidated is:
28% = US$456m ÷ US$1.6b (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.28 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.
Coca-Cola Consolidated's Earnings Growth And 28% ROE
To begin with, Coca-Cola Consolidated has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 19% also doesn't go unnoticed by us. As a result, Coca-Cola Consolidated's exceptional 48% net income growth seen over the past five years, doesn't come as a surprise.
We then compared Coca-Cola Consolidated's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.0% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Coca-Cola Consolidated fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Coca-Cola Consolidated Making Efficient Use Of Its Profits?
Coca-Cola Consolidated has a really low three-year median payout ratio of 4.0%, meaning that it has the remaining 96% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.
Additionally, Coca-Cola Consolidated has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Summary
In total, we are pretty happy with Coca-Cola Consolidated's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard will have the 1 risk we have identified for Coca-Cola Consolidated.
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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.