Stock Analysis

Alpha and Omega Semiconductor Limited's (NASDAQ:AOSL) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

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NasdaqGS:AOSL
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Alpha and Omega Semiconductor's (NASDAQ:AOSL) stock is up by a considerable 28% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Alpha and Omega Semiconductor's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Alpha and Omega Semiconductor

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Alpha and Omega Semiconductor is:

2.0% = US$9.5m ÷ US$475m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Alpha and Omega Semiconductor's Earnings Growth And 2.0% ROE

It is quite clear that Alpha and Omega Semiconductor's ROE is rather low. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Thus, the low net income growth of 3.8% seen by Alpha and Omega Semiconductor over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Alpha and Omega Semiconductor's reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.

past-earnings-growth
NasdaqGS:AOSL Past Earnings Growth March 11th 2021

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Alpha and Omega Semiconductor fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Alpha and Omega Semiconductor Using Its Retained Earnings Effectively?

Summary

In total, we're a bit ambivalent about Alpha and Omega Semiconductor's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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What are the risks and opportunities for Alpha and Omega Semiconductor?

Alpha and Omega Semiconductor Limited designs, develops, and supplies power semiconductor products for computing, consumer electronics, communication, and industrial applications in Hong Kong, China, South Korea, the United States, and internationally.

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Rewards

  • Price-To-Earnings ratio (2.2x) is below the US market (15.6x)

  • Earnings grew by 533.3% over the past year

Risks

  • Earnings are forecast to decline by an average of 81.7% per year for the next 3 years

  • High level of non-cash earnings

  • Shareholders have been diluted in the past year

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