Edwards Lifesciences (NYSE:EW) Will Want To Turn Around Its Return Trends

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Edwards Lifesciences (NYSE:EW) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Edwards Lifesciences is:

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

0.13 = US$1.5b ÷ (US$13b - US$1.5b) (Based on the trailing twelve months to December 2024).

Therefore, Edwards Lifesciences has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Medical Equipment industry average of 9.7% it's much better.

Check out our latest analysis for Edwards Lifesciences

Above you can see how the current ROCE for Edwards Lifesciences 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 Edwards Lifesciences for free.

How Are Returns Trending?

When we looked at the ROCE trend at Edwards Lifesciences, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 13%. However it looks like Edwards Lifesciences 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.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Edwards Lifesciences' reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 11% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

While Edwards Lifesciences doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for EW on our platform.

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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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.