Ultra Clean Holdings (NASDAQ:UCTT) Has Some Way To Go To Become A Multi-Bagger

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. In light of that, when we looked at Ultra Clean Holdings (NASDAQ:UCTT) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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)

0.048 = US$76m ÷ (US$1.9b - US$359m) (Based on the trailing twelve months to September 2024).

Thus, Ultra Clean Holdings has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 8.6%.

Check out 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.

What Can We Tell From Ultra Clean Holdings' ROCE Trend?

The returns on capital haven't changed much for Ultra Clean Holdings in recent years. The company has employed 91% more capital in the last five years, and the returns on that capital have remained stable at 4.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Ultra Clean Holdings' ROCE

As we've seen above, Ultra Clean Holdings' returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 64% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Ultra Clean Holdings that we think you should be aware of.

While Ultra Clean Holdings 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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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.