If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Alpha and Omega Semiconductor, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.061 = US$40m ÷ (US$874m - US$212m) (Based on the trailing twelve months to March 2021).
Thus, Alpha and Omega Semiconductor has an ROCE of 6.1%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 11%.
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 report for Alpha and Omega Semiconductor.
How Are Returns Trending?
We're delighted to see that Alpha and Omega Semiconductor is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 6.1% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Alpha and Omega Semiconductor is utilizing 174% 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 On Alpha and Omega Semiconductor's ROCE
In summary, it's great to see that Alpha and Omega Semiconductor has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 114% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Alpha and Omega Semiconductor does have some risks though, and we've spotted 1 warning sign for Alpha and Omega Semiconductor that you might be interested in.
While Alpha and Omega Semiconductor may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
This article by Simply Wall St is general in nature. 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.
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