Has Mondelez International, Inc. (NASDAQ:MDLZ) Stock's Recent Performance Got Anything to Do With Its Financial Health?

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Simply Wall St

Sat, Sep 16, 2023, 7:00 AM 4 min read

Most readers would already know that Mondelez International's (NASDAQ:MDLZ) stock increased by 3.0% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Mondelez International's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Mondelez International

How Do You 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 Mondelez International is:

14% = US$4.1b ÷ US$29b (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Mondelez International's Earnings Growth And 14% ROE

At first glance, Mondelez International seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. However, for some reason, the higher returns aren't reflected in Mondelez International's meagre five year net income growth average of 2.6%. That's a bit unexpected from a company which has such a high rate of return. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.

As a next step, we compared Mondelez International's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.

past-earnings-growth — NasdaqGS:MDLZ Past Earnings Growth September 16th 2023

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. What is MDLZ worth today? The intrinsic value infographic in our free research report helps visualize whether MDLZ is currently mispriced by the market.

Is Mondelez International Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 48% (implying that the company retains the remaining 52% of its income), Mondelez International's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Mondelez International has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 51% of its profits over the next three years. Still, forecasts suggest that Mondelez International's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Mondelez International certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.