Coca-Cola Consolidated (NASDAQ:COKE) has had a great run on the share market with its stock up by a significant 46% over the last 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. In this article, we decided to focus on Coca-Cola Consolidated’s ROE.

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.

Check out our latest analysis for Coca-Cola Consolidated

How To Calculate Return On Equity?

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:

30% = US$451m ÷ US$1.5b (Based on the trailing twelve months to September 2023).

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 $0.30 in profit.

Why Is ROE Important For Earnings Growth?

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.

A Side By Side comparison of Coca-Cola Consolidated’s Earnings Growth And 30% ROE

Firstly, we acknowledge that Coca-Cola Consolidated has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 16% also doesn’t go unnoticed by us. Under the circumstances, Coca-Cola Consolidated’s considerable five year net income growth of 54% was to be expected.

Next, on comparing with the industry net income growth, we found that Coca-Cola Consolidated’s growth is quite high when compared to the industry average growth of 4.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). 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 Efficiently Re-investing Its Profits?

Coca-Cola Consolidated’s ‘ three-year median payout ratio is on the lower side at 3.8% implying that it is retaining a higher percentage (96%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Coca-Cola Consolidated is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

Overall, we are quite pleased 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. 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.