Coca-Cola FEMSA. de (NYSE:KOF) has had a rough month with its share price down 6.2%. However, stock prices are usually driven by a company's financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Coca-Cola FEMSA. de's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

Return on equity 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 Coca-Cola FEMSA. de is:

15% = Mex$23b ÷ Mex$148b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.15.

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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Coca-Cola FEMSA. de's Earnings Growth And 15% ROE

To begin with, Coca-Cola FEMSA. de seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. This certainly adds some context to Coca-Cola FEMSA. de's moderate 16% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Coca-Cola FEMSA. de's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Coca-Cola FEMSA. de is trading on a high P/E or a low P/E, relative to its industry.

Is Coca-Cola FEMSA. de Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 64% (or a retention ratio of 36%) 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.

Moreover, Coca-Cola FEMSA. de is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 59%. As a result, Coca-Cola FEMSA. de's ROE is not expected to change by much either, which we inferred from the analyst estimate of 18% for future ROE.

Summary

In total, we are pretty happy 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.