Stock Analysis

Declining Stock and Decent Financials: Is The Market Wrong About Ultra Clean Holdings, Inc. (NASDAQ:UCTT)?

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NasdaqGS:UCTT
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It is hard to get excited after looking at Ultra Clean Holdings' (NASDAQ:UCTT) recent performance, when its stock has declined 19% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Ultra Clean Holdings' ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Ultra Clean Holdings

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Ultra Clean Holdings is:

10% = US$92m ÷ US$896m (Based on the trailing twelve months to July 2022).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.10.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Ultra Clean Holdings' Earnings Growth And 10% ROE

To start with, Ultra Clean Holdings' ROE looks acceptable. Yet, the fact that the company's ROE is lower than the industry average of 19% does temper our expectations. However, the moderate 16% net income growth seen by Ultra Clean Holdings over the past five years is definitely a positive. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also provides some context to the earnings growth seen by the company.

We then compared Ultra Clean Holdings' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 26% in the same period, which is a bit concerning.

past-earnings-growth
NasdaqGS:UCTT Past Earnings Growth September 5th 2022

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Ultra Clean Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Ultra Clean Holdings Efficiently Re-investing Its Profits?

Ultra Clean Holdings 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 decent earnings growth number that we discussed above.

Conclusion

On the whole, we do feel that Ultra Clean Holdings has some positive attributes. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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 Ultra Clean Holdings 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.

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About NasdaqGS:UCTT

Ultra Clean Holdings

Ultra Clean Holdings, Inc. develops and supplies critical subsystems, components and parts, and ultra-high purity cleaning and analytical services for the semiconductor industry in the United States and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation0
Future Growth3
Past Performance1
Financial Health5
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet with moderate growth potential.