Lockheed Martin (NYSE:LMT) needs to do more to multiply its value in the future

If you are looking for a multi-bagger, there are a few things to look out for. In a perfect world, we would like to see a company investing more capital into its business and, ideally, the returns generated from that capital also increase. When you see this, it usually means it is a company with a great business model and plenty of profitable reinvestment opportunities. However, ROCE is currently high for Lockheed Martin (NYSE:LMT) we are not jumping out of our chairs because earnings are falling.

Return on Capital Employed (ROCE): What is it?

For those who don’t know, ROCE is a measure of a company’s annual profit before taxes (its return) relative to the capital employed in the company. The formula for this calculation at Lockheed Martin is:

Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)

0.24 = $9.0 billion ÷ ($55 billion – $18 billion) (Based on the last twelve months to March 2024).

So, Lockheed Martin has a ROCE of 24%. That’s a fantastic return, and not only that, it also beats the 9.6% average earned by companies in a similar industry.

Check out our latest analysis for Lockheed Martin

In the chart above, we compared Lockheed Martin’s ROCE with its past performance, but the future is arguably more important. If you’re interested, you can check out analyst forecasts in our free Analyst report for Lockheed Martin.

What can we learn from Lockheed Martin’s ROCE trend?

Lockheed Martin is fairly stable. Capital employed and return on capital have remained more or less the same over the past five years. This tells us that the company is not reinvesting in itself, so it is plausible that it is past the growth phase. So it may not be a multibagger in the making, but given its decent 24% return on capital, it would be hard to find fault with the company’s current operations. This probably explains why Lockheed Martin pays out 48% of its profits to shareholders in the form of dividends. Unless companies have extremely attractive growth opportunities, they usually return some money to shareholders.

Finally…

While Lockheed Martin has an impressive return on capital, it is not increasing it. With the stock up an impressive 47% over the past five years, investors must expect there is more to come. If the underlying trends continue, we would not expect the company to become a multibagger in the future.

And one more thing: We have found 1 warning sign with Lockheed Martin, and understanding this should be part of your investment process.

If you want to see other companies that deliver high returns, check out our free A list of high-yielding companies with solid balance sheets can be found here.

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