Examining Kulicke and Soffa Industries, Inc.’s (NASDAQ:KLIC) Weak Return On Capital Employed
Today we'll evaluate Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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?
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:
0.022 = US$20m ÷ (US$1.1b - US$202m) (Based on the trailing twelve months to December 2019.)
So, Kulicke and Soffa Industries has an ROCE of 2.2%.
Check out our latest analysis for Kulicke and Soffa Industries
Is Kulicke and Soffa Industries's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Kulicke and Soffa Industries's ROCE appears meaningfully below the 9.8% average reported by the Semiconductor industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Kulicke and Soffa Industries's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
We can see that, Kulicke and Soffa Industries currently has an ROCE of 2.2%, less than the 9.3% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Kulicke and Soffa Industries's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Kulicke and Soffa Industries's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Kulicke and Soffa Industries has total assets of US$1.1b and current liabilities of US$202m. As a result, its current liabilities are equal to approximately 18% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
What We Can Learn From Kulicke and Soffa Industries's ROCE
While that is good to see, Kulicke and Soffa Industries has a low ROCE and does not look attractive in this analysis. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
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. Thank you for reading.
