Is McDonald's Holdings Company (Japan), Ltd.'s (TYO:2702) Stock's Recent Performance A Reflection Of Its Financial Health?

Most readers would already know that McDonald's Holdings Company (Japan)'s (TYO:2702) stock increased by 3.2% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to McDonald's Holdings Company (Japan)'s ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for McDonald's Holdings Company (Japan)

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 McDonald's Holdings Company (Japan) is:

12% = JP¥20b ÷ JP¥171b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.12.

Why Is ROE Important For 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.

McDonald's Holdings Company (Japan)'s Earnings Growth And 12% ROE

To start with, McDonald's Holdings Company (Japan)'s ROE looks acceptable. Especially when compared to the industry average of 6.6% the company's ROE looks pretty impressive. This certainly adds some context to McDonald's Holdings Company (Japan)'s exceptional 48% net income growth seen over the past five years. We believe that there might also 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 McDonald's Holdings Company (Japan)'s growth is quite high when compared to the industry average growth of 13% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is McDonald's Holdings Company (Japan) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is McDonald's Holdings Company (Japan) Efficiently Re-investing Its Profits?

McDonald's Holdings Company (Japan)'s ' three-year median payout ratio is on the lower side at 22% implying that it is retaining a higher percentage (78%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, McDonald's Holdings Company (Japan) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that McDonald's Holdings Company (Japan)'s performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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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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