It is hard to get excited after looking at Coca-Cola FEMSA. de's (NYSE:KOF) recent performance, when its stock has declined 5.6% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Coca-Cola FEMSA. de's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How To Calculate Return On Equity?
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:
11% = Mex$13b ÷ Mex$120b (Based on the trailing twelve months to June 2021).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.11 in profit.
What Has ROE Got To Do With 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. 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.
Coca-Cola FEMSA. de's Earnings Growth And 11% ROE
To start with, Coca-Cola FEMSA. de's ROE looks acceptable. Even when compared to the industry average of 11% the company's ROE looks quite decent. This certainly adds some context to Coca-Cola FEMSA. de's moderate 12% net income growth seen over the past five years.
As a next step, we compared Coca-Cola FEMSA. de's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 11% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is KOF fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Coca-Cola FEMSA. de Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 84% (or a retention ratio of 16%) for Coca-Cola FEMSA. de suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Additionally, Coca-Cola FEMSA. de has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 72% of its profits over the next three years. Still, forecasts suggest that Coca-Cola FEMSA. de's future ROE will rise to 15% even though the the company's payout ratio is not expected to change by much.
Overall, we are quite pleased with Coca-Cola FEMSA. de's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
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