If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. That’s why when we briefly looked at McDonald’s’ (NYSE:MCD) ROCE trend, we were very happy with what we saw.
Understanding Return On Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for McDonald’s, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.22 = US$11b ÷ (US$52b – US$4.6b) (Based on the trailing twelve months to March 2023).
Thus, McDonald’s has an ROCE of 22%. In absolute terms that’s a great return and it’s even better than the Hospitality industry average of 9.1%.
Above you can see how the current ROCE for McDonald’s compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is McDonald’s’ ROCE Trending?
It’s hard not to be impressed by McDonald’s’ returns on capital. The company has employed 53% more capital in the last five years, and the returns on that capital have remained stable at 22%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that’s even better. You’ll see this when looking at well operated businesses or favorable business models.
McDonald’s has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we’re thrilled about. And long term investors would be thrilled with the 101% return they’ve received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing, we’ve spotted 2 warning signs facing McDonald’s that you might find interesting.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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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.
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