Align Technology (NASDAQ: ALGN ) stock has gained 17% over the past month. Given that the market has long rewarded strong financial stocks, we wondered if that was the case in this case. Specifically, we decided to examine Align Technology’s ROE for this article.
ROE, or return on equity, is a useful tool for evaluating how effectively a company is generating a return on investment from its shareholders. In other words, it reveals the company’s success in converting shareholder investment into profit.
Check out our latest analysis for Align Technology
How to calculate return on equity?
Return on equity can be calculated using the following formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Therefore, according to the above formula, the ROE of Tongmeng Technology is:
14% = $511m ÷ $3.7b (based on trailing 12 months to September 2022).
The “return” is the income the business earned in the last year. Therefore, this means that for every $1 invested by shareholders, the company generates $0.14 in profit.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates profits. Based on how much of these profits the company reinvests, or “retains,” and how efficiently it does so, we are able to assess a company’s potential for profitable growth. In general, companies with high return on equity and profit retention have higher growth rates than companies without these attributes, other things being equal.
Align Technology’s earnings growth and 14% return on equity
First, Align Technology appears to have a solid ROE. Even when compared to the industry average of 12%, the company’s ROE looks pretty good. As such, this may have set the stage for Align Technology to post a respectable 18% growth over the past five years.
We then compared the net profit growth rate of Tongmeng Technology with the industry, and found that the company’s growth rate was similar to the industry average growth rate of 17% during the same period.
Earnings growth is an important metric to consider when evaluating stocks. Investors should try to determine whether expected earnings growth or decline (whichever the case may be) is priced in. Doing so will help them determine whether the stock’s future is promising or ominous. A good indicator of expected earnings growth is the price-to-earnings ratio, which determines how much the market is willing to pay for a stock based on its earnings prospects. Therefore, you may want to check whether Align Technology’s P/E ratio is high or low relative to its industry.
Is Align Technology effectively reinvesting its profits?
Given that Align Technology does not pay any dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow the business.
Overall, we are very pleased with Align Technology’s performance. We particularly like that the company is heavily reinvesting in its business at a high rate of return. Not surprisingly, this has led to impressive earnings growth. We also looked at the latest analyst forecasts and found that the company’s earnings growth is expected to be similar to its current growth rate.To know more about the company’s future earnings growth forecast, check out this free Report on the company’s analyst forecasts to learn more.
What are the risks and opportunities alignment technique?
Revenue expected to grow 15.96% annually
Profit margin (13.2%) is lower than last year (19.7%)
View all risks and rewards
Have feedback on this article? Concerned about content? keep in touch Contact us directly. Alternatively, email the editorial team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.