There's Been No Shortage Of Growth Recently For Alpha and Omega Semiconductor's (NASDAQ:AOSL) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.00036 = US$355k ÷ (US$1.2b - US$160m) (Based on the trailing twelve months to March 2024).

Therefore, Alpha and Omega Semiconductor has an ROCE of 0.04%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.7%.

See our latest analysis for Alpha and Omega Semiconductor

Above you can see how the current ROCE for Alpha and Omega Semiconductor compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Alpha and Omega Semiconductor .

What Can We Tell From Alpha and Omega Semiconductor's ROCE Trend?

The fact that Alpha and Omega Semiconductor is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 0.04% on its capital. And unsurprisingly, like most companies trying to break into the black, Alpha and Omega Semiconductor is utilizing 75% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line

Long story short, we're delighted to see that Alpha and Omega Semiconductor's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 169% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Like most companies, Alpha and Omega Semiconductor does come with some risks, and we've found 1 warning sign that you should be aware of.

While Alpha and Omega Semiconductor isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.