There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Ergo, when we looked at the ROCE trends at Align Technology (NASDAQ:ALGN), we liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)
0.22 = US$868m ÷ (US$5.8b - US$1.8b) (Based on the trailing twelve months to June 2022).
So, Align Technology has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 9.2%.
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 here for free.
What Does the ROCE Trend For Align Technology Tell Us?
We'd be pretty happy with returns on capital like Align Technology. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 255% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
What We Can Learn From Align Technology's ROCE
Align Technology has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And given the stock has only risen 32% over the last five years, we'd suspect the market is beginning to recognize these trends. So to determine if Align Technology is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.
Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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