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Today we’ll look at Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Kulicke and Soffa Industries:
0.14 = US$166m ÷ (US$1.1b – US$143m) (Based on the trailing twelve months to December 2018.)
Therefore, Kulicke and Soffa Industries has an ROCE of 14%.
Is Kulicke and Soffa Industries’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Kulicke and Soffa Industries’s ROCE is fairly close to the Semiconductor industry average of 14%. Separate from Kulicke and Soffa Industries’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Kulicke and Soffa Industries currently has an ROCE of 14%, compared to its ROCE of 3.6% 3 years ago. This makes us wonder if the company is improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Kulicke and Soffa Industries.
What Are Current Liabilities, And How Do They Affect Kulicke and Soffa Industries’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Kulicke and Soffa Industries has total liabilities of US$143m and total assets of US$1.1b. As a result, its current liabilities are equal to approximately 13% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Kulicke and Soffa Industries’s ROCE
This is good to see, and with a sound ROCE, Kulicke and Soffa Industries could be worth a closer look. You might be able to find a better buy than Kulicke and Soffa Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Kulicke and Soffa Industries better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.