Is the recent stock performance of Lam Research Corporation (NASDAQ: LRCX) related to its strong fundamentals?
Most readers already know that Lam Research (NASDAQ: LRCX) stock has risen significantly 14% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on the ROE of Lam Research.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
How to calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, Lam Research’s ROE is:
73% = US $ 4.3B ÷ US $ 5.8B (Based on the last twelve months up to September 2021).
The “return” is the amount earned after tax over the past twelve months. Another way to look at it is that for every dollar in equity, the company was able to make $ 0.73 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
Lam Research earnings growth and 73% ROE
First, we recognize that Lam Research has a significantly high ROE. Additionally, the company’s ROE is 16% higher than the industry average, which is quite remarkable. As a result, Lam Research’s exceptional 20% net profit growth seen over the past five years is no surprise.
We then compared the growth in net income of Lam Research with the industry and we are delighted to see that the growth number of the company is higher compared to the industry which has a growth rate of 15% at the during the same period.
NasdaqGS: LRCX Past Profit Growth December 26, 2021
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. What is LRCX worth today? The intrinsic value infographic in our free research report helps to visualize whether LRCX is currently poorly valued by the market.
Is Lam Research Using Profits Effectively?
Lam Research’s three-year median payout ratio is fairly moderate 26%, which means the company keeps 74% of its revenue. So it looks like Lam Research is reinvesting effectively in a way that achieves impressive earnings growth (discussed above) and pays out a well-hedged dividend.
In addition, Lam Research paid dividends over an eight-year period. This shows that the company is committed to sharing the profits with its shareholders. After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to drop to 16% over the next three years. The forecast still suggests that Lam Research’s future ROE will drop to 51% even if the company’s payout ratio is expected to decline. This suggests that other factors could be behind the anticipated decline in the company’s ROE.
Overall, we are quite happy with the performance of Lam Research. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
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