In This Article:
Today we'll evaluate Align Technology, Inc. (NASDAQ:ALGN) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Align Technology:
0.31 = US$489m ÷ (US$2.3b - US$789m) (Based on the trailing twelve months to June 2019.)
So, Align Technology has an ROCE of 31%.
See our latest analysis for Align Technology
Is Align Technology's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Align Technology's ROCE is meaningfully higher than the 10.0% average in the Medical Equipment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Align Technology's ROCE currently appears to be excellent.
In our analysis, Align Technology's ROCE appears to be 31%, compared to 3 years ago, when its ROCE was 23%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Align Technology's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.