Lam Research (NASDAQ:LRCX) Knows How To Allocate Capital – Yahoo Canada Shine On
There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 Lam Research's (NASDAQ:LRCX) ROCE trend, we were very happy with what we saw.
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Lam Research:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.36 = US$5.3b ÷ (US$19b – US$4.2b) (Based on the trailing twelve months to June 2023).
So, Lam Research has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 12%.
Check out 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'd like, you can check out the forecasts from the analysts covering Lam Research here for free.
In terms of Lam Research's history of ROCE, it's quite impressive. The company has employed 57% more capital in the last five years, and the returns on that capital have remained stable at 36%. Now considering ROCE is an attractive 36%, this combination is actually pretty appealing because it means the business can consistently put money to work and generate these high returns. You'll see this when looking at well operated businesses or favorable business models.
In short, we'd argue Lam Research has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. On top of that, the stock has rewarded shareholders with a remarkable 344% return to those who've held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
Lam Research does have some risks though, and we've spotted 1 warning sign for Lam Research that you might be interested in.
Lam Research is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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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