National Beverage Corp.'s (NASDAQ:FIZZ) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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National Beverage (NASDAQ:FIZZ) has had a rough three months with its share price down 7.0%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to National Beverage's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for National Beverage

How To Calculate Return On Equity?

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 National Beverage is:

60% = US$184m ÷ US$307m (Based on the trailing twelve months to July 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.60.

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 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 National Beverage's Earnings Growth And 60% ROE

To begin with, National Beverage has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. Yet, National Beverage has posted measly growth of 4.7% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that National Beverage's reported growth was lower than the industry growth of 13% over the last few years, which is not something we like to see.

past-earnings-growth
NasdaqGS:FIZZ Past Earnings Growth October 31st 2024

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is FIZZ worth today? The intrinsic value infographic in our free research report helps visualize whether FIZZ is currently mispriced by the market.

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