Doximity's Declining ROCE: A Trade-Off for Sustainable Growth or a Cause for Concern?

Return on Capital Employed (ROCE) is a critical metric for evaluating a company's ability to generate profits from its capital. For high-growth firms like Doximity (NYSE: DOCS), a declining ROCE can signal either a strategic reinvestment in future growth or a warning sign of inefficiency. As the healthcare technology sector evolves, investors must weigh these factors carefully.

The ROCE Dilemma: Decline or Transformation?

Doximity's ROCE has shown a nuanced trajectory. According to recent data, its trailing twelve-month ROCE as of June 2025 stands at 23%, down from a peak of 30% five years earlier. This decline contrasts with earlier reports citing a ROCE of 17.37% for 2023–2025. The discrepancy likely stems from differing methodologies (GAAP vs. non-GAAP metrics) and reporting periods. For instance, the 23% figure incorporates Q2 2025 results, where adjusted EBITDA hit $69.7 million (50.4% margin), while the 17.37% figure reflects annualized averages.

The decline in ROCE is not inherently alarming. Doximity has reinvested heavily in AI-driven tools like Doximity GPT and its AI Scribe, which require upfront capital but promise long-term scalability. These investments align with the company's strategy to dominate the digital healthcare ecosystem. The trade-off is clear: short-term ROCE compression in exchange for capturing market share in a sector projected to grow at 15% annually.

Capital Deployment: Efficiency Amid Expansion

Doximity's balance sheet underscores its disciplined capital management. As of March 31, 2025, the company held $915.66 million in cash and short-term investments against just $12.4 million in total debt, creating a negative net debt position of -$197.22 million. This liquidity allows for strategic reinvestment without overleveraging.

The company's free cash flow has surged, reaching $266.7 million in FY2025, up 50% year-over-year. This cash flow is being redirected into R&D and platform enhancements, particularly in AI integration. For example, the AI Scribe tool, launched in 2024, has driven user engagement and retention, contributing to a 20% annual revenue growth. While these investments temporarily lower ROCE, they position Doximity to monetize its platform more effectively in the long term.

Industry Context and Risk Assessment

Doximity's ROCE of 23% remains well above the 9.2% industry average for healthcare services, highlighting its competitive edge. However, the healthcare tech sector is highly competitive, with rivals like Teladoc and Amwell also investing in AI. Doximity's ability to sustain its ROCE will depend on its capacity to differentiate its offerings and maintain pricing power.

A key risk lies in the regulatory environment. The company faces ongoing legal challenges related to data privacy and antitrust concerns. While its strong balance sheet provides a buffer, any regulatory setbacks could strain capital efficiency. Investors should monitor these risks alongside the company's R&D spending and market share gains.

Investment Implications

For long-term investors, Doximity's declining ROCE appears to be a calculated trade-off rather than a red flag. The company's focus on AI-driven innovation and its robust free cash flow generation suggest that reinvestment is fueling sustainable growth. However, the stock's valuation—trading at a premium to peers—requires careful scrutiny.

The stock has delivered an 80% return for shareholders over three years, outperforming the S&P 500. This performance, coupled with a strong balance sheet and industry-leading ROCE, supports a bullish outlook. That said, investors should consider dollar-cost averaging to mitigate volatility and diversify exposure to the healthcare tech sector.

Conclusion

Doximity's declining ROCE is a symptom of its aggressive reinvestment strategy, not a sign of inefficiency. By prioritizing AI and platform scalability, the company is positioning itself to capitalize on the digital transformation of healthcare. While risks remain, the combination of strong cash flow, low debt, and industry-leading profitability makes Doximity a compelling long-term investment for those comfortable with the sector's volatility.

In the end, the question is not whether ROCE is declining, but whether the capital being deployed today will yield outsized returns tomorrow. For Doximity, the answer appears to be a resounding yes.