Edwards Lifesciences (NYSE:EW) Is Reinvesting To Multiply In Value
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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Edwards Lifesciences' (NYSE:EW) trend of ROCE, we really liked what we saw.
What is 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. Analysts use this formula to calculate it for Edwards Lifesciences:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$1.5b ÷ (US$7.7b - US$886m) (Based on the trailing twelve months to June 2021).
Thus, Edwards Lifesciences has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Medical Equipment industry average of 8.7%.
See 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 here for free.
What Can We Tell From Edwards Lifesciences' ROCE Trend?
Edwards Lifesciences deserves to be commended in regards to it's returns. The company has employed 89% more capital in the last five years, and the returns on that capital have remained stable at 23%. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.
The Bottom Line On Edwards Lifesciences' ROCE
In short, we'd argue Edwards Lifesciences has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 210% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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.
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