McDonald's Holdings Company (Japan), Ltd.'s (TSE:2702) Stock Has Fared Decently: Is the Market Following Strong Financials?

McDonald's Holdings Company (Japan)'s (TSE:2702) stock is up by 7.4% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to McDonald's Holdings Company (Japan)'s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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:

13% = JP¥33b ÷ JP¥254b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.13 in profit.

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

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

McDonald's Holdings Company (Japan)'s Earnings Growth And 13% ROE

To begin with, McDonald's Holdings Company (Japan) seems to have a respectable ROE. Even when compared to the industry average of 11% the company's ROE looks quite decent. This probably goes some way in explaining McDonald's Holdings Company (Japan)'s moderate 11% growth over the past five years amongst other factors.

As a next step, we compared McDonald's Holdings Company (Japan)'s net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 43% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 2702 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is McDonald's Holdings Company (Japan) Making Efficient Use Of Its Profits?

In McDonald's Holdings Company (Japan)'s case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 22% (or a retention ratio of 78%), which suggests that the company is investing most of its profits to grow its business.

Moreover, McDonald's Holdings Company (Japan) is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we are quite pleased with McDonald's Holdings Company (Japan)'s performance. 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 a good amount of growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.