Alpha and Omega Semiconductor Limited's (NASDAQ:AOSL) Stock Is Going Strong: Have Financials A Role To Play?
Alpha and Omega Semiconductor's (NASDAQ:AOSL) stock is up by a considerable 19% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Alpha and Omega Semiconductor's ROE today.
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.
Check out our latest analysis for Alpha and Omega Semiconductor
How To Calculate Return On Equity?
ROE 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:
3.2% = US$29m ÷ US$887m (Based on the trailing twelve months to March 2023).
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 $0.03 in profit.
Why Is ROE Important For 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.
A Side By Side comparison of Alpha and Omega Semiconductor's Earnings Growth And 3.2% ROE
It is hard to argue that Alpha and Omega Semiconductor's ROE is much good in and of itself. Not just that, even compared to the industry average of 16%, the company's ROE is entirely unremarkable. However, we we're pleasantly surprised to see that Alpha and Omega Semiconductor grew its net income at a significant rate of 65% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Alpha and Omega Semiconductor's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 33%.
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. Doing so will help them establish if the stock's future looks promising or ominous. Is Alpha and Omega Semiconductor fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Alpha and Omega Semiconductor Making Efficient Use Of Its Profits?
Alpha and Omega Semiconductor doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.
Summary
In total, it does look like Alpha and Omega Semiconductor has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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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.
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