Will Weakness in Monster Beverage Corporation's (NASDAQ:MNST) Stock Prove Temporary Given Strong Fundamentals?

Simply Wall St
·3 min read

Monster Beverage (NASDAQ:MNST) has had a rough month with its share price down 6.1%. 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. Specifically, we decided to study Monster Beverage'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Monster Beverage

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Monster Beverage is:

26% = US$1.4b ÷ US$5.5b (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.26 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Monster Beverage's Earnings Growth And 26% ROE

First thing first, we like that Monster Beverage has an impressive ROE. Secondly, even when compared to the industry average of 20% the company's ROE is quite impressive. This likely paved the way for the modest 15% net income growth seen by Monster Beverage over the past five years. growth

Next, on comparing with the industry net income growth, we found that Monster Beverage's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for MNST? You can find out in our latest intrinsic value infographic research report.

Is Monster Beverage Making Efficient Use Of Its Profits?

Conclusion

In total, we are pretty happy with Monster Beverage's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. 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.

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