Stock Analysis

Investors Will Want Allegro MicroSystems' (NASDAQ:ALGM) Growth In ROCE To Persist

NasdaqGS:ALGM
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Allegro MicroSystems (NASDAQ:ALGM) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.18 = US$174m ÷ (US$1.1b - US$137m) (Based on the trailing twelve months to December 2022).

So, Allegro MicroSystems has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 14% generated by the Semiconductor industry.

View our latest analysis for Allegro MicroSystems

roce
NasdaqGS:ALGM Return on Capital Employed April 24th 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.

SWOT Analysis for Allegro MicroSystems

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is not viewed as a risk.
Weakness
  • Expensive based on P/E ratio and estimated fair value.
Opportunity
  • Annual earnings are forecast to grow faster than the American market.
Threat
  • Revenue is forecast to grow slower than 20% per year.

The Trend Of ROCE

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 18%. 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 43%. So we're very much inspired by what we're seeing at Allegro MicroSystems thanks to its ability to profitably reinvest capital.

Our Take On 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 investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 70% return over the last year. In light of that, we think it's worth looking further into this stock because if Allegro MicroSystems can keep these trends up, it could have a bright future ahead.

Like most companies, Allegro MicroSystems does come with some risks, and we've found 1 warning sign that 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.