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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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 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. Analysts use this formula to calculate it for Allegro MicroSystems:

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

0.16 = US$237m ÷ (US$1.6b - US$120m) (Based on the trailing twelve months to December 2023).

Therefore, Allegro MicroSystems has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 11% it's much better.

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

So How Is Allegro MicroSystems' ROCE Trending?

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 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 118% more capital is being employed now too. So we're very much inspired by what we're seeing at Allegro MicroSystems thanks to its ability to profitably reinvest capital.

The Key Takeaway

All in all, it's terrific to see that Allegro MicroSystems is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 17% 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. So with that in mind, we think the stock deserves further research.

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

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.