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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at the ROCE trend of KLA (NASDAQ:KLAC) we really liked what we saw.
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on KLA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.34 = US$3.6b ÷ (US$15b – US$4.7b) (Based on the trailing twelve months to June 2024).
Thus, KLA has an ROCE of 34%. In absolute terms that’s a great return and it’s even better than the Semiconductor industry average of 9.0%.
Check out our latest analysis for KLA
In the above chart we have measured KLA’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering KLA for free.
We like the trends that we’re seeing from KLA. Over the last five years, returns on capital employed have risen substantially to 34%. Basically the business is earning more per dollar of capital invested and in addition to that, 49% more capital is being employed now too. So we’re very much inspired by what we’re seeing at KLA thanks to its ability to profitably reinvest capital.
For the record though, there was a noticeable increase in the company’s current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 30% of its operations, which isn’t ideal. It’s worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
All in all, it’s terrific to see that KLA is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 317% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it’s worth researching the company further to see if these trends are likely to persist.