Do the company's financials play a role in the recent rise in Align Technology's (NASDAQ:ALGN) stock price?

Most readers would already know that the Align Technology (NASDAQ:ALGN) stock price has increased by a significant 25% over the past three months. Since a company's long-term fundamentals typically drive market outcomes, we wonder what role, if any, a company's financials play in price movements. I am thinking. In particular, I would like to pay attention to Align Technology's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. Simply put, it is used to evaluate a company's profitability compared to its equity.

Check out our latest analysis for Align Technology.

How is ROE calculated?

Return on equity can be calculated using the following formula:

Return on equity = Net income (from continuing operations) ÷ Shareholders' equity

So, based on the above formula, Align Technology's ROE is:

12% = USD 445 million ÷ USD 3.6 billion (based on trailing twelve months to December 2023).

“Earnings” is the amount of your after-tax earnings over the past 12 months. One way he conceptualizes this is that for every dollar of shareholders' equity, the company earned him $0.12 in profit.

What is the relationship between ROE and profit growth rate?

So far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.

Align Technology's Revenue Growth and ROE of 12%

Firstly, Align Technology appears to have a respectable ROE. Even compared to the industry average of 11%, the company's ROE looks pretty decent. However, while his ROE for Align Technology is quite good, the five-year net income decline was 13%. So there may be some other aspects that could explain this. For example, if a company pays out a large portion of its earnings as dividends or if it faces competitive pressures.

So, as a next step, we compared Align Technology's performance to the industry and were disappointed to find that the company has been shrinking its revenues, while the industry has grown its revenues at a rate of 14% over the past few years. Did.

Earnings growth is a big factor in stock valuation. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. One good indicator of expected earnings growth is the P/E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. So it may be worth checking whether Align Technology is trading on a higher or lower P/E ratio relative to its industry.

Is Align Technology effectively utilizing its retained earnings?

Align Technology does not pay dividends. That means all of the profits could potentially be reinvested into the business, but if they were keeping all of the profits, that doesn't explain why the company's profits have declined. Therefore, there may be other factors at play here that could potentially inhibit growth. For example, businesses are facing some headwinds.

summary

Overall, there appear to be some positive aspects to Align Technology's business. However, despite its high ROE and high reinvestment rate, it's disappointing to see that earnings aren't growing. We believe there are several external factors that can negatively impact our business. Having said that, we researched the latest analyst forecasts and found that while the company has seen its earnings shrink in the past, analysts expect future earnings to grow. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.