Today we'll look at Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Kulicke and Soffa Industries:
0.11 = US$101m ÷ (US$1.1b - US$123m) (Based on the trailing twelve months to March 2019.)
So, Kulicke and Soffa Industries has an ROCE of 11%.
Is Kulicke and Soffa Industries's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Kulicke and Soffa Industries's ROCE appears to be around the 10% average of the Semiconductor industry. Separate from how Kulicke and Soffa Industries stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
We can see that , Kulicke and Soffa Industries currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 3.7%. This makes us wonder if the company is improving. You can see in the image below how Kulicke and Soffa Industries's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Kulicke and Soffa Industries.
Do Kulicke and Soffa Industries's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. 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$123m and total assets of US$1.1b. As a result, its current liabilities are equal to approximately 11% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From Kulicke and Soffa Industries's ROCE
That said, Kulicke and Soffa Industries's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Kulicke and Soffa Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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.