Returns At Ultra Clean Holdings (NASDAQ:UCTT) Appear To Be Weighed Down

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Ultra Clean Holdings (NASDAQ:UCTT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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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. To calculate this metric for Ultra Clean Holdings, this is the formula:

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

0.058 = US$92m ÷ (US$1.9b - US$336m) (Based on the trailing twelve months to December 2024).

Therefore, Ultra Clean Holdings has an ROCE of 5.8%. On its own, that's a low figure but it's around the 7.2% average generated by the Semiconductor industry.

See our latest analysis for Ultra Clean Holdings

In the above chart we have measured Ultra Clean Holdings' 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 Ultra Clean Holdings for free.

How Are Returns Trending?

The returns on capital haven't changed much for Ultra Clean Holdings in recent years. The company has employed 96% more capital in the last five years, and the returns on that capital have remained stable at 5.8%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Key Takeaway

In summary, Ultra Clean Holdings has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 79% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Ultra Clean Holdings does have some risks though, and we've spotted 2 warning signs for Ultra Clean Holdings that you might be interested in.

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.