There are a few things to check for while searching for a multi-bagger. Among other things, we will be looking for two things: an increase in the company’s capital employed and a rising return on capital employed (ROCE). In the end, this proves that the company is reinvesting earnings at rising rates of return. Thus, we were pleased with our observations of Lam Research’s (NASDAQ:LRCX) ROCE trends.
For those who may not be clear, return on capital employed (ROCCE) measures the pre-tax revenue (in percentage terms) that a corporation generates from the capital that it has invested in its operations. Here is the formula to compute this measure for Lam Research:
The returns on capital for Lam Research are difficult to ignore. Over the past five years, the firm has added 76% more capital, and the returns on that capital have been steady at 32%. It’s fantastic that the company can keep reinvesting its money at such enticing rates of return given such high returns. It wouldn’t surprise us if the business become a multi-bagger if these trends can hold.
In conclusion, as these are typical characteristics of a multi-bagger, we’re happy to find that Lam Research has been compounding gains by reinvesting at consistently high rates of return. Furthermore, investors who have held the stock for the past five years have received a stunning 394% return. Despite the fact that investors appear to be seeing these encouraging tendencies, we still think more investigation into the company is warranted.