Many Would Be Envious Of Lincoln Electric Holdings' (NASDAQ:LECO) Excellent Returns On Capital

By
Simply Wall St
Published
January 18, 2022
NasdaqGS:LECO
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Lincoln Electric Holdings (NASDAQ:LECO) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.24 = US$433m ÷ (US$2.6b - US$745m) (Based on the trailing twelve months to September 2021).

Therefore, Lincoln Electric Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Machinery industry average of 10%.

See our latest analysis for Lincoln Electric Holdings

roce
NasdaqGS:LECO Return on Capital Employed January 18th 2022

Above you can see how the current ROCE for Lincoln Electric 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.

What Does the ROCE Trend For Lincoln Electric Holdings Tell Us?

In terms of Lincoln Electric Holdings' history of ROCE, it's quite impressive. The company has employed 47% more capital in the last five years, and the returns on that capital have remained stable at 24%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In summary, we're delighted to see that Lincoln Electric Holdings has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 85% return if they held over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

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.

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