Align Technology (NASDAQ:ALGN) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Align Technology (NASDAQ:ALGN), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Align Technology is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.17 = US$683m ÷ (US$6.2b - US$2.0b) (Based on the trailing twelve months to June 2024).

So, Align Technology has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 9.1% generated by the Medical Equipment industry.

Check out our latest analysis for Align Technology

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'd like, you can check out the forecasts from the analysts covering Align Technology for free.

What Can We Tell From Align Technology's ROCE Trend?

When we looked at the ROCE trend at Align Technology, we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 17%. However it looks like Align Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Align Technology's ROCE

To conclude, we've found that Align Technology is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 44% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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

While Align Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.