Why We Like The Returns At Lincoln Electric Holdings (NASDAQ:LECO)
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Lincoln Electric Holdings (NASDAQ:LECO) looks great, so lets see what the trend can tell us.
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 Lincoln Electric Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = US$623m ÷ (US$3.3b - US$836m) (Based on the trailing twelve months to March 2023).
Therefore, Lincoln Electric Holdings has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Machinery industry average of 11%.
See our latest analysis for Lincoln Electric Holdings
In the above chart we have measured Lincoln Electric Holdings' 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 Lincoln Electric Holdings here for free.
The Trend Of ROCE
We like the trends that we're seeing from Lincoln Electric Holdings. The data shows that returns on capital have increased substantially over the last five years to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 25% more capital is being employed now too. So we're very much inspired by what we're seeing at Lincoln Electric Holdings thanks to its ability to profitably reinvest capital.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Lincoln Electric Holdings has. Since the stock has returned a staggering 138% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
If you want to continue researching Lincoln Electric Holdings, you might be interested to know about the 2 warning signs that our analysis has discovered.
Lincoln Electric Holdings 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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