Returns On Capital Are Showing Encouraging Signs At Kulicke and Soffa Industries (NASDAQ:KLIC)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Kulicke and Soffa Industries (NASDAQ:KLIC) and its trend of ROCE, we really liked what we saw.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Kulicke and Soffa Industries, this is the formula:

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

0.17 = US$166m ÷ (US$1.3b - US$260m) (Based on the trailing twelve months to April 2021).

Therefore, Kulicke and Soffa Industries has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 11% it's much better.

See our latest analysis for Kulicke and Soffa Industries

In the above chart we have measured Kulicke and Soffa Industries' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kulicke and Soffa Industries here for free.

What Does the ROCE Trend For Kulicke and Soffa Industries Tell Us?

Kulicke and Soffa Industries is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 17%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Kulicke and Soffa Industries' ROCE

To sum it up, Kulicke and Soffa Industries has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing Kulicke and Soffa Industries that you might find interesting.

While Kulicke and Soffa Industries 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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