Yahoo Finance There Are Reasons To Feel Uneasy About Ultra Clean Holdings' (NASDAQ:UCTT) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Ultra Clean Holdings (NASDAQ:UCTT), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Ultra Clean Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = US$45m ÷ (US$1.9b - US$329m) (Based on the trailing twelve months to March 2024).
So, Ultra Clean Holdings has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 9.7%.
View our latest analysis for Ultra Clean Holdings
Above you can see how the current ROCE for Ultra Clean Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ultra Clean Holdings for free.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Ultra Clean Holdings doesn't inspire confidence. Around five years ago the returns on capital were 6.1%, but since then they've fallen to 2.9%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Ultra Clean Holdings' ROCE
In summary, we're somewhat concerned by Ultra Clean Holdings' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 255% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you'd like to know about the risks facing Ultra Clean Holdings, we've discovered 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
