To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 on that note, Alpha and Omega Semiconductor (NASDAQ:AOSL) looks quite promising in regards to its trends of return on capital.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Alpha and Omega Semiconductor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$79m ÷ (US$992m - US$257m) (Based on the trailing twelve months to September 2021).
Therefore, Alpha and Omega Semiconductor has an ROCE of 11%. In isolation, that's a pretty standard return but against the Semiconductor industry average of 15%, it's not as good.
In the above chart we have measured Alpha and Omega Semiconductor's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alpha and Omega Semiconductor.
What The Trend Of ROCE Can Tell Us
Alpha and Omega Semiconductor is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 152% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Our Take On Alpha and Omega Semiconductor's ROCE
All in all, it's terrific to see that Alpha and Omega Semiconductor is reaping the rewards from prior investments and is growing its capital base. And with a respectable 100% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Alpha and Omega Semiconductor can keep these trends up, it could have a bright future ahead.
If you'd like to know about the risks facing Alpha and Omega Semiconductor, we've discovered 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
Valuation is complex, but we're helping make it simple.
Find out whether Alpha and Omega Semiconductor is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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.
Excellent balance sheet with solid track record.