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Understanding Diageo plc's (LON:DGE) performance as a company requires examining more than earnings from one point in time. Today I will take you through a basic sense check to gain perspective on how Diageo is doing by evaluating its latest earnings with its longer term trend as well as its industry peers' performance over the same period.
Was DGE's recent earnings decline indicative of a tough track record?
DGE's trailing twelve-month earnings (from 31 December 2018) of UK£2.9b has declined by -8.3% compared to the previous year.
Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of 6.7%, indicating the rate at which DGE is growing has slowed down. Why is this? Well, let’s take a look at what’s transpiring with margins and whether the entire industry is feeling the heat.
In terms of returns from investment, Diageo has invested its equity funds well leading to a 28% return on equity (ROE), above the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 9.9% exceeds the GB Beverage industry of 9.1%, indicating Diageo has used its assets more efficiently. And finally, its return on capital (ROC), which also accounts for Diageo’s debt level, has increased over the past 3 years from 14% to 16%. This correlates with a decrease in debt holding, with debt-to-equity ratio declining from 121% to 109% over the past 5 years.
What does this mean?
Though Diageo's past data is helpful, it is only one aspect of my investment thesis. Companies that are profitable, but have volatile earnings, can have many factors impacting its business. I recommend you continue to research Diageo to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DGE’s future growth? Take a look at our free research report of analyst consensus for DGE’s outlook.
- Financial Health: Are DGE’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.