The Returns At Lamb Weston Holdings (NYSE:LW) Provide Us With Signs Of What's To Come
If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after investigating Lamb Weston Holdings (NYSE:LW), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What is it?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Lamb Weston Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = US$615m ÷ (US$4.7b - US$1.0b) (Based on the trailing twelve months to May 2020).
So, Lamb Weston Holdings has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 7.9% generated by the Food industry.
Check out our latest analysis for Lamb Weston Holdings
Above you can see how the current ROCE for Lamb Weston Holdings 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.
The Trend Of ROCE
On the surface, the trend of ROCE at Lamb Weston Holdings doesn't inspire confidence. Over the last five years, returns on capital have decreased to 17% from 23% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On Lamb Weston Holdings' ROCE
To conclude, we've found that Lamb Weston Holdings is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 45% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
If you want to continue researching Lamb Weston Holdings, you might be interested to know about the 1 warning sign that our analysis has discovered.
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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