Coca-Cola FEMSA, S.A.B. de C.V.'s (NYSE:KOF) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?
Coca-Cola FEMSA. de's (NYSE:KOF) stock is up by 2.8% over the past week. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. In this article, we decided to focus on Coca-Cola FEMSA. de's ROE.
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.
Check out our latest analysis for Coca-Cola FEMSA. de
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Coca-Cola FEMSA. de is:
8.5% = Mex$10b ÷ Mex$122b (Based on the trailing twelve months to December 2020).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.08 in profit.
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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Coca-Cola FEMSA. de's Earnings Growth And 8.5% ROE
At first glance, Coca-Cola FEMSA. de's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 18% either. As a result, Coca-Cola FEMSA. de reported a very low income growth of 3.0% over the past five years.
We then compared Coca-Cola FEMSA. de's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.2% in the same period, which is a bit concerning.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for KOF? You can find out in our latest intrinsic value infographic research report.
Is Coca-Cola FEMSA. de Using Its Retained Earnings Effectively?
Coca-Cola FEMSA. de has a three-year median payout ratio of 64% (implying that it keeps only 36% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.
Additionally, Coca-Cola FEMSA. de 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 74% of its profits over the next three years. Still, forecasts suggest that Coca-Cola FEMSA. de's future ROE will rise to 11% even though the the company's payout ratio is not expected to change by much.
Conclusion
Overall, we would be extremely cautious before making any decision on Coca-Cola FEMSA. de. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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. 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.
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