Stock Analysis

Coca-Cola Consolidated, Inc. (NASDAQ:COKE) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

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NasdaqGS:COKE
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With its stock down 13% over the past three months, it is easy to disregard Coca-Cola Consolidated (NASDAQ:COKE). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Coca-Cola Consolidated's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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:

31% = US$281m ÷ US$902m (Based on the trailing twelve months to July 2022).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.31 in profit.

What Is The Relationship Between ROE And 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Coca-Cola Consolidated's Earnings Growth And 31% ROE

To begin with, Coca-Cola Consolidated has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. As a result, Coca-Cola Consolidated's exceptional 42% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Coca-Cola Consolidated's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 14% in the same period.

past-earnings-growth
NasdaqGS:COKE Past Earnings Growth August 29th 2022

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is COKE worth today? The intrinsic value infographic in our free research report helps visualize whether COKE is currently mispriced by the market.

Is Coca-Cola Consolidated Using Its Retained Earnings Effectively?

Coca-Cola Consolidated's ' three-year median payout ratio is on the lower side at 4.7% implying that it is retaining a higher percentage (95%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

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.

Summary

In total, we are pretty happy with Coca-Cola Consolidated's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for Coca-Cola Consolidated by visiting our risks dashboard for free on our platform here.

Valuation is complex, but we're helping make it simple.

Find out whether Coca-Cola Consolidated is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NasdaqGS:COKE

Coca-Cola Consolidated

Coca-Cola Consolidated, Inc., together with its subsidiaries, manufactures, markets, and distributes nonalcoholic beverages primarily products of The Coca-Cola Company in the United States.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation3
Future Growth0
Past Performance5
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Solid track record with adequate balance sheet.