Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Lam Research (NASDAQ:LRCX) looks great, so lets see what the trend can tell us.
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. The formula for this calculation on Lam Research is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.40 = US$5.9b ÷ (US$19b – US$4.4b) (Based on the trailing twelve months to March 2023).
So, Lam Research has an ROCE of 40%. In absolute terms that’s a great return and it’s even better than the Semiconductor industry average of 13%.
See our latest analysis for Lam Research
In the above chart we have measured Lam Research’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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Lam Research is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 40%. The amount of capital employed has increased too, by 52%. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.
The Bottom Line On Lam Research’s ROCE
To sum it up, Lam Research has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
While Lam Research looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether LRCX is currently trading for a fair price.
High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.
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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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