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Robust financials are driving the recent rally in Vita Coco Company, Inc. shares.
Vita Coco Company (NASDAQ:COCO) has had a great run on the stock market, with its shares rising a significant 27% over the past three months. Given that the market rewards strong financials over the long term, we wonder if that will be the case in this case. In this article, we decided to focus on Vita Coco Company ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability index that measures the rate of return on capital provided by the company’s shareholders.
Check out our latest analysis for Vita Coco Company
How do you calculate return on equity?
O formula for ROE It is:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, Vita Coco Company’s ROE is:
26% = US$54m ÷ US$210m (Based on trailing twelve months to March 2024).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every US$1 of investment by its shareholders, the company generates a profit of US$0.26.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an efficient profit-generating indicator for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we can then assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have a higher return on equity and higher profit retention are generally those that have a higher growth rate when compared to companies that do not have the same characteristics.
A Side-by-Side Comparison of Vita Coco Company’s 26% Earnings Growth and ROE
Firstly, we recognize that Vita Coco Company has a significantly high ROE. Furthermore, the company’s ROE is higher than the industry average of 19%, which is quite remarkable. This likely paved the way for the modest 15% net profit growth seen by Vita Coco Company over the past five years.
Next, comparing with the industry’s net profit growth, we see that Vita Coco Company’s growth is quite high when compared to the industry’s average growth of 8.0% over the same period, which is great to see.
past profit growth
Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine whether the stock’s future looks promising or ominous. Has the market priced in the future prospects for COCO? You can find out at our latest intrinsic value infographic research report.
The story continues
Is Vita Coco Company making efficient use of its profits?
Currently, Vita Coco Company does not pay regular dividends, which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number we discussed above.
Summary
In total, we are very happy with the performance of Vita Coco Company. In particular, it is great to see that the company is investing heavily in its business and, together with a high rate of return, this has resulted in considerable growth in its profits. The latest forecasts from industry analysts show that the company is expected to maintain its current growth rate. Are these analysts’ expectations based on general expectations for the industry or on the company’s fundamentals? Click here to be directed to our analysts’ forecast page for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.