Can Lattice Semiconductor (NASDAQ:LSCC) Continue To Grow Its Returns On Capital?
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Lattice Semiconductor (NASDAQ:LSCC) and its trend of ROCE, we really liked what we saw.
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 Lattice Semiconductor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = US$56m ÷ (US$680m - US$80m) (Based on the trailing twelve months to January 2021).
Therefore, Lattice Semiconductor has an ROCE of 9.4%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 10%.
Check out our latest analysis for Lattice Semiconductor
Above you can see how the current ROCE for Lattice Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Lattice Semiconductor here for free.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Lattice Semiconductor is reaping rewards from its investments and has now broken into profitability. The company now earns 9.4% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.
In Conclusion...
To bring it all together, Lattice Semiconductor has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 642% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if Lattice Semiconductor can keep these trends up, it could have a bright future ahead.
Lattice Semiconductor does have some risks though, and we've spotted 2 warning signs for Lattice Semiconductor that you might be interested in.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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.
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