Returns on Capital Paint A Bright Future For Allegro MicroSystems (NASDAQ:ALGM)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 when we looked at the ROCE trend of Allegro MicroSystems (NASDAQ:ALGM) we really liked what we saw.

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. 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$254m ÷ (US$1.2b - US$154m) (Based on the trailing twelve months to June 2023).

So, Allegro MicroSystems has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See 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 to see what analysts are forecasting going forward, you should check out our free report for Allegro MicroSystems.

What Does the ROCE Trend For Allegro MicroSystems Tell Us?

We like the trends that we're seeing from Allegro MicroSystems. Over the last four years, returns on capital employed have risen substantially to 23%. The amount of capital employed has increased too, by 65%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

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. Since the stock has returned a solid 61% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. 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.

On a separate note, we've found 1 warning sign for Allegro MicroSystems you'll probably want to know about.

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.

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

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.