With its stock down 5.5% over the past month, it is easy to disregard Monster Beverage (NASDAQ:MNST). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Monster Beverage’s ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Monster Beverage
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Monster Beverage is:
28% = US$1.6b ÷ US$5.8b (Based on the trailing twelve months to September 2024).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.28 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
First thing first, we like that Monster Beverage has an impressive ROE. Secondly, even when compared to the industry average of 16% the company’s ROE is quite impressive. This probably laid the groundwork for Monster Beverage’s moderate 6.8% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Monster Beverage’s reported growth was lower than the industry growth of 11% over the last few years, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is MNST fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
