Stock Analysis

Will Weakness in Lattice Semiconductor Corporation's (NASDAQ:LSCC) Stock Prove Temporary Given Strong Fundamentals?

Published
NasdaqGS:LSCC
Source: Shutterstock

It is hard to get excited after looking at Lattice Semiconductor's (NASDAQ:LSCC) recent performance, when its stock has declined 39% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Lattice Semiconductor's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Lattice Semiconductor

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Lattice Semiconductor is:

34% = US$212m ÷ US$626m (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.34.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the 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 that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Lattice Semiconductor's Earnings Growth And 34% ROE

First thing first, we like that Lattice Semiconductor has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. As a result, Lattice Semiconductor's exceptional 54% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Lattice Semiconductor's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 30%.

past-earnings-growth
NasdaqGS:LSCC Past Earnings Growth November 30th 2023

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Lattice Semiconductor fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lattice Semiconductor Efficiently Re-investing Its Profits?

Lattice Semiconductor doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, we are pretty happy with Lattice Semiconductor's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're helping make it simple.

Find out whether Lattice Semiconductor is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis