What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Edwards Lifesciences (NYSE:EW) looks attractive right now, so lets see what the trend of returns can tell us.
Understanding 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. The formula for this calculation on Edwards Lifesciences is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$1.3b ÷ (US$7.2b - US$894m) (Based on the trailing twelve months to December 2020).
So, Edwards Lifesciences has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 9.9%.
In the above chart we have measured Edwards Lifesciences' 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?
We'd be pretty happy with returns on capital like Edwards Lifesciences. Over the past five years, ROCE has remained relatively flat at around 21% and the business has deployed 77% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Edwards Lifesciences can keep this up, we'd be very optimistic about its future.
Our Take On Edwards Lifesciences' ROCE
Edwards Lifesciences has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. And the stock has done incredibly well with a 144% return over the last five years, so long term investors are no doubt ecstatic with that result. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.
On a separate note, we've found 1 warning sign for Edwards Lifesciences you'll probably want to know about.
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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