Onto Innovation (NYSE:ONTO) Will Want To Turn Around Its Return Trends

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Onto Innovation (NYSE:ONTO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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 Onto Innovation is:

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

0.07 = US$127m ÷ (US$2.0b - US$147m) (Based on the trailing twelve months to March 2024).

Therefore, Onto Innovation has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.7%.

View our latest analysis for Onto Innovation

Above you can see how the current ROCE for Onto Innovation compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Onto Innovation for free.

What Can We Tell From Onto Innovation's ROCE Trend?

On the surface, the trend of ROCE at Onto Innovation doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Onto Innovation's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 195% over the last three years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Onto Innovation could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for ONTO on our platform quite valuable.

While Onto Innovation 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.