Coca-Cola Bottlers Japan Holdings Inc.'s (TSE:2579) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Coca-Cola Bottlers Japan Holdings (TSE:2579) has had a great run on the share market with its stock up by a significant 9.5% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Coca-Cola Bottlers Japan Holdings' 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Coca-Cola Bottlers Japan Holdings

How Do You Calculate Return On Equity?

ROE 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 Bottlers Japan Holdings is:

1.2% = JP¥5.5b ÷ JP¥464b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.01 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Coca-Cola Bottlers Japan Holdings' Earnings Growth And 1.2% ROE

As you can see, Coca-Cola Bottlers Japan Holdings' ROE looks pretty weak. Even when compared to the industry average of 8.7%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Coca-Cola Bottlers Japan Holdings grew its net income at a significant rate of 53% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Coca-Cola Bottlers Japan Holdings' growth is quite high when compared to the industry average growth of 8.2% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is 2579 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Coca-Cola Bottlers Japan Holdings Efficiently Re-investing Its Profits?

Coca-Cola Bottlers Japan Holdings' very high LTM (or last twelve month) payout ratio of 165% suggests that the company is paying more to its shareholders than what it is earning. However, this hasn't hampered its ability to grow as we saw earlier. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 2 risks we have identified for Coca-Cola Bottlers Japan Holdings visit our risks dashboard for free.

Additionally, Coca-Cola Bottlers Japan Holdings 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.

Summary

Overall, we have mixed feelings about Coca-Cola Bottlers Japan Holdings. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.

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