It is hard to get excited after looking at Mondelez International’s (NASDAQ:MDLZ) recent performance, when its stock has declined 12% over the past three months. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Mondelez International’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Mondelez International
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Mondelez International is:
17% = US$4.6b ÷ US$27b (Based on the trailing twelve months to December 2024).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.17 in profit.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
To start with, Mondelez International’s ROE looks acceptable. Especially when compared to the industry average of 10% the company’s ROE looks pretty impressive. Despite this, Mondelez International’s five year net income growth was quite low averaging at only 3.4%. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn’t been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
We then compared Mondelez International’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 5.0% in the same 5-year period, which is a bit concerning.
