The Returns At Abiomed (NASDAQ:ABMD) Aren't Growing

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Abiomed's (NASDAQ:ABMD) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Abiomed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.19 = US$262m ÷ (US$1.5b - US$114m) (Based on the trailing twelve months to September 2021).

So, Abiomed has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Medical Equipment industry.

View our latest analysis for Abiomed

Above you can see how the current ROCE for Abiomed compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 19% and the business has deployed 235% more capital into its operations. 19% is a pretty standard return, and it provides some comfort knowing that Abiomed has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line

To sum it up, Abiomed has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 213% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

Like most companies, Abiomed does come with some risks, and we've found 3 warning signs that you should be aware of.

While Abiomed isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

What are the risks and opportunities for Abiomed?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.