Molson Coors Beverage ( NYSE:TAP ) is hard to get excited about after looking at its recent performance, with the stock down 11% over the past three months. It seems that the market has decided to completely ignore the fundamental positive aspects of the company and weigh more on the negative sides. Long-term fundamentals often drive market results, so it’s worth paying close attention. We’re paying particular attention to Molson Coors Beverage’s ROE today.
Return on equity or ROE is a key metric used to assess how efficiently a company’s management is using the company’s capital. In other words, it shows the company’s success in turning its equity investments into profits.
Check out our latest analysis of Molson Coors Beverage
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = net profit (from continuing operations) ÷ stockholders’ equity
Therefore, according to the formula above, the ROE for Molson Coors Beverage is:
1.9% = US$261m ÷ US$13b (based on twelve months to September 2023).
‘Return’ is the profit made in the last twelve months. Another way to think about it is that for every $1 in value, the company is able to make $0.02 in profit.
What does ROE have to do with earnings growth?
So far, we’ve learned that ROE measures how efficiently a company generates profits. By determining how much of these profits the company reinvests or “retains” and how effectively it does so, we can assess the company’s earnings growth potential. In general, other things being equal, firms with high returns on equity and retained earnings have higher growth rates than firms that do not share these characteristics.
Molson Coors beverage revenue growth and 1.9% ROE
Molson Coors Beverage’s ROE is obviously very low. Not only that, even compared to the industry average of 17 percent, the company’s ROE is completely unremarkable. Therefore, it may not be wrong to say that Molson Coors Beverage’s five-year net income decline of 27% is probably due to its low ROE. We believe there may be other aspects that could adversely affect the Company’s earnings prospects. For example, the business is poorly capitalized, or the company has a very high payout ratio.
However, when we compare Molson Coors Beverage’s growth to the industry, we find that while the company’s revenue has been declining, the industry’s revenue has grown by 3.6% over the same period. This is very serious.
Earnings growth is an important metric to consider when evaluating a stock. Investors must next decide whether the expected earnings growth or lack thereof is built into the stock price. This then helps them determine whether the stock is set for a bright or dark future. Is TAP worth it? This infographic on company intrinsic value has everything you need to know.
Is Molson Coors Beverage effectively reinvesting its profits?
Molson Coors Beverage’s low three-year average payout ratio of 15% (indicating that it retains the remaining 85% of its profits) is impressive when you combine it with declining earnings. This should not be the case when a company accumulates most of its revenue. There may be other reasons to explain the deficiency in this regard. For example, business may be declining.
In addition, Molson Coors Beverage has been paying dividends for at least a decade or more. Our latest analyst data shows that the company’s future payout ratio is expected to grow to 33% over the next three years. Regardless, future ROE for Molson Coors Beverage is estimated to grow to 7.7% despite the increase in payout ratio. Perhaps there are other factors that will drive future growth in ROE.
Overall, we’re a bit ambivalent about Molson Coors’ beverage performance. Although the company has a high investment flow, the low ROE means that all the reinvestment does not get any benefit for the investors, and in addition, it has a negative impact on the growth of the income. With that said, we have studied the latest analyst forecasts and found that while the company has reduced its earnings in the past, analysts expect earnings to grow in the future. Are these analysts’ expectations on the broader outlook for the industry or on the company’s fundamentals? Click here to be taken to our analyst forecast page for the company.
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