Should We Be Excited About The Trends Of Returns At Intuitive Surgical (NASDAQ:ISRG)?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Intuitive Surgical (NASDAQ:ISRG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Intuitive Surgical is:

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

0.11 = US$1.0b ÷ (US$11b - US$895m) (Based on the trailing twelve months to September 2020).

So, Intuitive Surgical has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10.0% generated by the Medical Equipment industry.

Check out our latest analysis for Intuitive Surgical

Above you can see how the current ROCE for Intuitive Surgical compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Intuitive Surgical here for free.

What Does the ROCE Trend For Intuitive Surgical Tell Us?

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 17% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Intuitive Surgical's ROCE

In summary, Intuitive Surgical is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 343% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in Intuitive Surgical it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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