Stock Analysis

Allegro MicroSystems (NASDAQ:ALGM) Is Experiencing Growth In Returns On Capital

NasdaqGS:ALGM
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Allegro MicroSystems (NASDAQ:ALGM) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Allegro MicroSystems:

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

0.17 = US$144m ÷ (US$980m - US$113m) (Based on the trailing twelve months to September 2022).

Thus, Allegro MicroSystems has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 15%.

View our latest analysis for Allegro MicroSystems

roce
NasdaqGS:ALGM Return on Capital Employed January 6th 2023

In the above chart we have measured Allegro MicroSystems' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Allegro MicroSystems.

What Can We Tell From Allegro MicroSystems' ROCE Trend?

Allegro MicroSystems is displaying some positive trends. The numbers show that in the last three years, the returns generated on capital employed have grown considerably to 17%. 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 32%. 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. And since the stock has fallen 10% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we've found 1 warning sign for Allegro MicroSystems that we think you should be aware of.

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

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.