It’s easy to ignore Lam Research (NASDAQ:LRCX), as its stock price has declined 20% over the past three months. However, a closer look at the company’s financial health might make you think again. The company is worth keeping an eye on, given that fundamentals usually drive long-term market outcomes. Specifically, we decided to examine Lam Research’s ROE in this article.
Return on equity or ROE tests how effectively a company is growing its value and managing investors’ money. In other words, ROE shows the return that each dollar of a shareholder’s investment generates.
Check out our latest analysis for Lam Research.
How do I calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, Lam Research’s ROE is:
45% = USD 3.8 billion ÷ USD 8.5 billion (based on trailing 12 months to June 2024).
“Earnings” is the amount of your after-tax earnings over the past 12 months. This means that for every $1 of shareholder investment, the company generates $0.45 in profit.
What is the relationship between ROE and profit growth?
So far, we have learned that ROE is a measure of a company’s profitability. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies with higher return on equity and profit retention typically have higher growth rates compared to companies that don’t have the same characteristics.
Lam Research’s Earnings Growth and ROE 45%
First of all, we like that Lam Research has a good ROE. Second, the company’s ROE is quite impressive, even when compared to the industry average of 12%. This likely paved the way for the meager 13% net income growth that Lam Research has seen over the past five years.
As a next step, we compared Lam Research’s net income growth with the industry and were disappointed to find that the company’s growth rate was lower than the industry average growth rate of 24% over the same period.
NasdaqGS:LRCX Historical Revenue Growth Rate September 27, 2024
Earnings growth is a big factor in stock valuation. It’s important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). That way, you’ll know if the stock is headed for clear blue waters or if a swamp awaits. What is LRCX worth today? Our free research report’s intrinsic value infographic helps you visualize whether LRCX is currently mispriced in the market.
Does Lam Research reinvest profits effectively?
Lam Research’s median three-year payout ratio to shareholders is a low 18% (meaning it retains 82% of its profits), so management is willing to spend a lot of money on profits to grow the business. It seems like they are reinvesting in.
Additionally, Lam Research has been paying dividends for at least 10 years. This shows that the company is committed to sharing profits with shareholders. Based on the latest analyst forecasts, we find that the company’s future dividend payout ratio over the next three years is expected to remain stable at 19%. Therefore, the company’s future ROE is also not expected to change much, with analysts expecting it to be 51%.
summary
Overall, I’m very satisfied with Lam Research’s performance. Specifically, we like that the company reinvests a huge amount of its profits at a high rate of return. Of course, this significantly increased the company’s revenue. We researched current analyst forecasts and found that analysts expect the company to continue its recent growth streak. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
