Alpha and Omega Semiconductor (NASDAQ:AOSL) Might Have The Makings Of A Multi-Bagger

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Alpha and Omega Semiconductor (NASDAQ:AOSL) so let's look a bit deeper.

What is 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$106m ÷ (US$1.2b - US$199m) (Based on the trailing twelve months to March 2022).

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 14%, it's not as good.

Check out our latest analysis for Alpha and Omega Semiconductor

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.

The Trend Of ROCE

The trends we've noticed at Alpha and Omega Semiconductor are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 240%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line

To sum it up, Alpha and Omega Semiconductor has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.

One more thing: We've identified 4 warning signs with Alpha and Omega Semiconductor (at least 2 which are significant) , and understanding them would certainly be useful.

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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.