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

It is hard to get excited after looking at Monster Beverage’s (NASDAQ:MNST) recent performance, when its stock has declined 5.7% over the past month. 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 test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

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 yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.28 in profit.

So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.

Firstly, we acknowledge that Monster Beverage has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 17% also doesn’t go unnoticed by us. This likely paved the way for the modest 6.8% net income growth seen by Monster Beverage over the past five years.

We then compared Monster Beverage’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for MNST? You can find out in our latest intrinsic value infographic research report.

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