Stock Analysis

Slowing Rates Of Return At Allegro MicroSystems (NASDAQ:ALGM) Leave Little Room For Excitement

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? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Allegro MicroSystems' (NASDAQ:ALGM) trend of ROCE, we liked what we saw.

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)

0.16 = US$128m ÷ (US$926m - US$112m) (Based on the trailing twelve months to June 2022).

Therefore, Allegro MicroSystems has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Semiconductor industry average of 15%.

See our latest analysis for Allegro MicroSystems

roce
NasdaqGS:ALGM Return on Capital Employed October 4th 2022

In the above chart we have measured Allegro MicroSystems' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Allegro MicroSystems' ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 16% for the last three years, and the capital employed within the business has risen 25% in that time. Since 16% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

In Conclusion...

The main thing to remember is that Allegro MicroSystems has proven its ability to continually reinvest at respectable rates of return. Yet over the last year the stock has declined 25%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

While Allegro MicroSystems doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Allegro MicroSystems may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.