What Can We Make Of Lam Research Corporation’s (NASDAQ:LRCX) High Return On Capital?
Today we are going to look at Lam Research Corporation (NASDAQ:LRCX) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Lam Research:
0.23 = US$2.5b ÷ (US$13b - US$2.1b) (Based on the trailing twelve months to March 2020.)
Therefore, Lam Research has an ROCE of 23%.
View our latest analysis for Lam Research
Is Lam Research's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Lam Research's ROCE is meaningfully better than the 9.2% average in the Semiconductor industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Lam Research's ROCE is currently very good.
We can see that, Lam Research currently has an ROCE of 23% compared to its ROCE 3 years ago, which was 18%. This makes us think the business might be improving. You can see in the image below how Lam Research's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Lam Research's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Lam Research has total assets of US$13b and current liabilities of US$2.1b. As a result, its current liabilities are equal to approximately 16% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
What We Can Learn From Lam Research's ROCE
, Lam Research shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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This article by Simply Wall St is general in nature. 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. Thank you for reading.
