Ultra Clean Holdings (NASDAQ:UCTT) Will Want To Turn Around Its Return Trends

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Analysts use this formula to calculate it for Ultra Clean Holdings:

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

0.024 = US$37m ÷ (US$1.9b - US$310m) (Based on the trailing twelve months to December 2023).

Thus, Ultra Clean Holdings has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.

See 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're interested, you can view the analysts predictions in our free analyst report for Ultra Clean Holdings .

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

In terms of Ultra Clean Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 7.3% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Ultra Clean Holdings have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 321% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Ultra Clean Holdings could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for UCTT on our platform quite valuable.

While Ultra Clean Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.