Intuitive Surgical (NASDAQ:ISRG) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Intuitive Surgical (NASDAQ:ISRG) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Intuitive Surgical, this is the formula:

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

0.11 = US$1.2b ÷ (US$12b - US$905m) (Based on the trailing twelve months to March 2021).

Therefore, Intuitive Surgical has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.9% generated by the Medical Equipment industry.

Check out our latest analysis for Intuitive Surgical

In the above chart we have measured Intuitive Surgical's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

In terms of Intuitive Surgical's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 11% from 16% five years ago. However it looks like Intuitive Surgical might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

To conclude, we've found that Intuitive Surgical is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 319% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Intuitive Surgical could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Intuitive Surgical may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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