Allegro MicroSystems (NASDAQ:ALGM) Hasn't Managed To Accelerate Its Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Allegro MicroSystems' (NASDAQ:ALGM) ROCE trend, we were pretty happy with what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Allegro MicroSystems:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = US$218m ÷ (US$1.5b - US$118m) (Based on the trailing twelve months to March 2024).

Therefore, Allegro MicroSystems has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.5% it's much better.

Check out our latest analysis for Allegro MicroSystems

Above you can see how the current ROCE for Allegro MicroSystems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Allegro MicroSystems .

What Can We Tell From Allegro MicroSystems' ROCE Trend?

While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 118% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Allegro MicroSystems has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Key Takeaway

The main thing to remember is that Allegro MicroSystems has proven its ability to continually reinvest at respectable rates of return. However, over the last three years, the stock has only delivered a 2.2% return to shareholders who held over that period. So to determine if Allegro MicroSystems is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you're still interested in Allegro MicroSystems it's worth checking out our FREE intrinsic value approximation for ALGM to see if it's trading at an attractive price in other respects.

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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com