Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Lattice Semiconductor (NASDAQ:LSCC) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Lattice Semiconductor:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = US$145m ÷ (US$828m - US$80m) (Based on the trailing twelve months to June 2024).

Therefore, Lattice Semiconductor has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.0% it's much better.

In the above chart we have measured Lattice Semiconductor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Lattice Semiconductor .

How Are Returns Trending?

We like the trends that we're seeing from Lattice Semiconductor. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 19%. The amount of capital employed has increased too, by 40%. So we're very much inspired by what we're seeing at Lattice Semiconductor thanks to its ability to profitably reinvest capital.

The Key Takeaway

All in all, it's terrific to see that Lattice Semiconductor is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 178% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Lattice Semiconductor looks impressive, no company is worth an infinite price. The intrinsic value infographic for LSCC helps visualize whether it is currently trading for a fair price.

While Lattice Semiconductor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.