Most readers would already be aware that the Constellation Brands (NYSE: STZ) portfolio has increased significantly by 17% over the last three months. As most would know, this is basically what usually drives market price movements in the long run, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Constellation Brands’ ROE in this article.
Return on equity or ROE is an important factor to consider by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success in turning shareholder investment into profit.
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, ROE for Constellation Brands is:
15% = US $ 2.1b ÷ US $ 14b (Based on the subsequent twelve months to November 2020).
‘Return’ is the amount earned after tax in the last twelve months. One way to conceptualize this is that for every $ 1 of the share capital it has, the company earned $ 0.15 in profit.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company chooses to reinvest or “keep”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profits, the higher the growth of a company compared to companies that do not necessarily have these characteristics.
Constellation Brands earnings growth and 15% ROE
At first glance, Constellation Brands seems to have a decent ROE. In addition, the company’s ROE corresponds to the industry average of 19%. However, we are curious as to how Constellation Brands’ decent returns have still resulted in flat growth for Constellation Brands over the past five years. We anticipate that there could be some other factors at play here that are limiting the company’s growth. Eg. The company pays out a large part of its earnings as dividends or faces competitive pressure.
We then compared Constellation Brands’ net revenue growth with the industry and found that the industry’s average growth was 8.7% over the same period.
Earnings growth is an important measure to consider when evaluating a stock. What investors need to determine next is whether the expected earnings growth or the lack of it is already built into the stock price. By doing so, they will have an idea of whether the stock is heading out into clear blue waters, or if swampy waters await. What is STZ worth today? That inherent value infographic in our free research report helps visualize whether STZ is currently incorrectly priced by the market.
Do Constellation Brands effectively invest its profits?
Constellation Brands’ low three-year payout ratio of 21% (implying that the company retains 79% of its revenue) should mean that the company retains most of its earnings to nurture growth, and this should be reflected in its growth rate. , But that is not the case.
In addition, Constellation Brands has paid dividends for six years, which is a long time, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the company’s future payout ratio is expected to increase to 26% over the next three years. Regardless, ROE is not expected to change much for the company despite the higher expected payout ratio.
Overall, it seems that Constellation Brands has some positive aspects to its business. However, given the high return on investment and the high profit maintenance, we would expect the company to deliver strong earnings growth, but this is not the case here. This suggests that there may be an external threat to the company, which hampers its growth. When that is the case, recent forecasts for industry analysts show that analysts expect to see a huge improvement in the company’s earnings growth. Are the expectations of these analysts based on the broad expectations of the industry or on the fundamentals of the company? Click here to be taken to our analyst’s forecast page for the company.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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