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With its stock down 11% over the past three months, it is easy to disregard Coca-Cola FEMSA. de (NYSE:KOF). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Coca-Cola FEMSA. de's ROE.
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.
See our latest analysis for Coca-Cola FEMSA. de
How To 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' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.15 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. 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. 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.
A Side By Side comparison of Coca-Cola FEMSA. de's Earnings Growth And 15% ROE
At first glance, Coca-Cola FEMSA. de seems to have a decent ROE. Even when compared to the industry average of 17% the company's ROE looks quite decent. This probably goes some way in explaining Coca-Cola FEMSA. de's moderate 16% growth over the past five years amongst other factors.
We then compared Coca-Cola FEMSA. de's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Coca-Cola FEMSA. de's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.