If you’re looking for a multi-bagger, there’s a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. So on that note, McDonald’s Holdings Company (Japan) (TYO:2702) looks quite promising in regards to its trends of return on capital.
What is 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. To calculate this metric for McDonald’s Holdings Company (Japan), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.17 = JP¥31b ÷ (JP¥233b – JP¥50b) (Based on the trailing twelve months to December 2020).
Thus, McDonald’s Holdings Company (Japan) has an ROCE of 17%. On its own, that’s a standard return, however it’s much better than the 6.3% generated by the Hospitality industry.
View our latest analysis for McDonald’s Holdings Company (Japan)
Above you can see how the current ROCE for McDonald’s Holdings Company (Japan) compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering McDonald’s Holdings Company (Japan) here for free.
How Are Returns Trending?
The fact that McDonald’s Holdings Company (Japan) is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it’s now earning 17% on its capital. In addition to that, McDonald’s Holdings Company (Japan) is employing 33% more capital than previously which is expected of a company that’s trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line On McDonald’s Holdings Company (Japan)’s ROCE
Long story short, we’re delighted to see that McDonald’s Holdings Company (Japan)’s reinvestment activities have paid off and the company is now profitable. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.
While McDonald’s Holdings Company (Japan) looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 2702 is currently trading for a fair price.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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