If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Allegro MicroSystems (NASDAQ:ALGM) looks decent, right now, so lets see what the trend of returns can tell us.

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)

0.15 = US$218m ÷ (US$1.5b - US$118m) (Based on the trailing twelve months to March 2024).

Therefore, Allegro MicroSystems has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 9.5% it's much better.

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're interested, you can view the analysts predictions in our free analyst report for Allegro MicroSystems .

The Trend Of ROCE

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 118% in that time. 15% is a pretty standard return, and it provides some comfort knowing that Allegro MicroSystems has consistently earned this amount. 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.

Our Take On Allegro MicroSystems' ROCE

In the end, Allegro MicroSystems has proven its ability to adequately reinvest capital at good rates of return. And given the stock has only risen 2.2% over the last three years, we'd suspect the market is beginning to recognize these trends. So to determine if Allegro MicroSystems is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

If you're still interested in Allegro MicroSystems it's worth checking out our FREE intrinsic value approximation for ALGM to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.

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