Shareholders Optimistic, Alignment Technology (NASDAQ: ALGN) Will Multiply Value
What are the first trends to look for to identify a title that could multiply over the long term? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. Therefore, when we briefly examined Align technologies (NASDAQ: ALGN) Trend ROCE, we were very happy with what we saw.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Align Technology is:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.24 = US $ 885 million Ã· (US $ 5.4 billion – US $ 1.7 billion) (Based on the last twelve months up to June 2021).
Thereby, Align Technology has a ROCE of 24%. This is a fantastic return and not only that, it exceeds the 8.9% average earned by companies in a similar industry.
See our latest review for Align Technology
Above you can see how Align Technology’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Align Technology.
What the ROCE trend can tell us
It’s hard not to be impressed with Align Technology’s returns on capital. The company has employed 288% more capital over the past five years, and returns on that capital have remained stable at 24%. Such returns are the envy of most companies and given that they have repeatedly reinvested at these rates, even better. You’ll see this by looking at well-run companies or favorable business models.
Our opinion on Align Technology’s ROCE
In summary, we are delighted to see that Align Technology has compounded returns by reinvesting at consistently high rates of return, as these are common characteristics of a multi-bagger. And long-term investors would be delighted with the 594% return they’ve received over the past five years. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.
One more thing to note, we have identified 2 warning signs with Align Technology and understanding them should be part of your investment process.
If you’d like to see other companies driving high returns, check out our free List of high yielding companies with strong balance sheets here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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