Fevertree Drinks PLC's (LON:FEVR) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

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editorial-team@simplywallst.com (Simply Wall St)

Sun, Feb 16, 2025, 1:30 AM 4 min read

Fevertree Drinks (LON:FEVR) has had a great run on the share market with its stock up by a significant 12% over the last month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. Specifically, we decided to study Fevertree Drinks' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Fevertree Drinks

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Fevertree Drinks is:

9.4% = UK£22m ÷ UK£233m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.09.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Fevertree Drinks' Earnings Growth And 9.4% ROE

At first glance, Fevertree Drinks' ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 15%. For this reason, Fevertree Drinks' five year net income decline of 26% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

However, when we compared Fevertree Drinks' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.9% in the same period. This is quite worrisome.

past-earnings-growth — AIM:FEVR Past Earnings Growth February 16th 2025

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is FEVR fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Fevertree Drinks Making Efficient Use Of Its Profits?

Fevertree Drinks' declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 76% (or a retention ratio of 24%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 2 risks we have identified for Fevertree Drinks.

Moreover, Fevertree Drinks has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 59% over the next three years. As a result, the expected drop in Fevertree Drinks' payout ratio explains the anticipated rise in the company's future ROE to 14%, over the same period.

Summary

Overall, we would be extremely cautious before making any decision on Fevertree Drinks. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.