There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Align Technology (NASDAQ:ALGN) and its ROCE trend, we weren’t exactly thrilled.
What Is 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. Analysts use this formula to calculate it for Align Technology:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = US$751m ÷ (US$5.9b – US$1.8b) (Based on the trailing twelve months to September 2022).
Thus, Align Technology has an ROCE of 18%. On its own, that’s a standard return, however it’s much better than the 11% generated by the Medical Equipment industry.
Above you can see how the current ROCE for Align Technology 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 report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Align Technology, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 18% from 25% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Align Technology’s ROCE
In summary, Align Technology is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. And in the last five years, the stock has given away 20% so the market doesn’t look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.
On a final note, we’ve found 1 warning sign for Align Technology that we think you should be aware of.
While Align Technology 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.
What are the risks and opportunities for Align Technology?
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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.