McDonald's Holdings Company (Japan)'s (TSE:2702) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of McDonald's Holdings Company (Japan) (TSE:2702) looks decent, right now, so lets see what the trend of returns can tell us.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for McDonald's Holdings Company (Japan):

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = JP¥48b ÷ (JP¥337b - JP¥76b) (Based on the trailing twelve months to December 2024).

Therefore, McDonald's Holdings Company (Japan) has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 9.7% it's much better.

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

In the above chart we have measured McDonald's Holdings Company (Japan)'s prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for McDonald's Holdings Company (Japan) .

What Can We Tell From McDonald's Holdings Company (Japan)'s ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has consistently earned 18% for the last five years, and the capital employed within the business has risen 56% in that time. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line

In the end, McDonald's Holdings Company (Japan) has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 17% return to shareholders who held over that period. So to determine if McDonald's Holdings Company (Japan) is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

While McDonald's Holdings Company (Japan) doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for 2702 on our platform.

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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.