Stock Analysis

Allegro MicroSystems (NASDAQ:ALGM) Is Achieving High Returns On Its Capital

NasdaqGS:ALGM
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, the ROCE of Allegro MicroSystems (NASDAQ:ALGM) looks great, so lets see what the trend can tell us.

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

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. To calculate this metric for Allegro MicroSystems, this is the formula:

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

0.23 = US$270m ÷ (US$1.3b - US$134m) (Based on the trailing twelve months to September 2023).

Thus, Allegro MicroSystems has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.

See our latest analysis for Allegro MicroSystems

roce
NasdaqGS:ALGM Return on Capital Employed November 3rd 2023

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'd like, you can check out the forecasts from the analysts covering Allegro MicroSystems here for free.

What Can We Tell From Allegro MicroSystems' ROCE Trend?

We like the trends that we're seeing from Allegro MicroSystems. The data shows that returns on capital have increased substantially over the last four years to 23%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 75%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Allegro MicroSystems' ROCE

To sum it up, Allegro MicroSystems has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 13% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Allegro MicroSystems does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Valuation is complex, but we're helping make it simple.

Find out whether Allegro MicroSystems is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.