The Returns On Capital At Onto Innovation (NYSE:ONTO) Don't Inspire Confidence

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. 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 investigating Onto Innovation (NYSE:ONTO), we don't think it's current trends fit the mold of a multi-bagger.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Onto Innovation:

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

0.11 = US$180m ÷ (US$1.8b - US$137m) (Based on the trailing twelve months to July 2023).

Thus, Onto Innovation has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 12%.

Check out 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

On the surface, the trend of ROCE at Onto Innovation doesn't inspire confidence. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like Onto Innovation might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Onto Innovation's ROCE

In summary, Onto Innovation is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 295% gain to shareholders who have held over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Onto Innovation could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation 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.