Capital Investments At Edwards Lifesciences (NYSE:EW) Point To A Promising Future

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ergo, when we looked at the ROCE trends at Edwards Lifesciences (NYSE:EW), we liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Edwards Lifesciences, this is the formula:

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

0.21 = US$1.9b ÷ (US$10b - US$1.2b) (Based on the trailing twelve months to June 2024).

Thus, 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 9.6%.

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 for free.

What Can We Tell From Edwards Lifesciences' ROCE Trend?

We'd be pretty happy with returns on capital like Edwards Lifesciences. The company has consistently earned 21% for the last five years, and the capital employed within the business has risen 82% in that time. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Edwards Lifesciences can keep this up, we'd be very optimistic about its future.

What We Can Learn From Edwards Lifesciences' ROCE

In summary, we're delighted to see that Edwards Lifesciences has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

While Edwards Lifesciences looks impressive, no company is worth an infinite price. The intrinsic value infographic for EW helps visualize whether it is currently trading for a fair price.

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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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.