Yahoo Finance There's Been No Shortage Of Growth Recently For Allegro MicroSystems' (NASDAQ:ALGM) 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Allegro MicroSystems' (NASDAQ:ALGM) returns on capital, so let's have a look.
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. 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$237m ÷ (US$1.6b - US$120m) (Based on the trailing twelve months to December 2023).
Thus, Allegro MicroSystems has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.7% it's much better.
Check out our latest analysis for Allegro MicroSystems
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, you can check out the forecasts from the analysts covering Allegro MicroSystems for free.
The Trend Of ROCE
Investors would be pleased with what's happening at Allegro MicroSystems. The data shows that returns on capital have increased substantially over the last four years to 16%. 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 118%. 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
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Allegro MicroSystems has. Investors may not be impressed by the favorable underlying trends yet because over the last three years the stock has only returned 0.4% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation for ALGM that compares the share price and estimated value.
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.
