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What trends should we look for if we want to identify stocks that can increase in value over the long term? Generally, we will want to notice a growing trend come back on capital employed (ROCE) and at the same time, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. However, after briefly reviewing the numbers, we don’t think Intuitive surgery (NASDAQ: ISRG) has the makings of a multi-bagger going forward, but let’s see why it can be.
Understanding Return on Capital Employed (ROCE)
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Intuitive Surgical is:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.11 = 1.0 billion USD ÷ (11 billion USD – 895 million USD) (Based on the last twelve months up to September 2020).
So, Intuitive Surgical has a ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 10.0% generated by the medical device industry.
Check out our latest review for intuitive surgery
Above you can see how Intuitive Surgical’s current ROCE compares to its past returns on capital, but you can’t say more about the past. If you like, you can view analyst forecasts covering Intuitive Surgical here for free.
What does the ROCE trend tell us for intuitive surgery?
In terms of Intuitive Surgical’s historic ROCE movements, the trend is not great. Over the past five years, the return on capital has fallen to 11% from 17% five years ago. On the other hand, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are long-term games. It may take some time for the business to begin to see a change in the benefits of these investments.
The basics on Intuitive Surgical’s ROCE
In summary, Intuitive Surgical is reinvesting funds into the business for growth, but sadly it looks like sales haven’t grown much yet. Investors must think there are better things to come because the stock has kicked it out of the park, offering a 343% gain to shareholders who have owned in the past five years. However, unless these underlying trends turn more positive, our hopes would not be too high.
If you are still interested in intuitive surgery, check out our FREE approximation of intrinsic value to see if it trades attractively in other respects.
If you want to look for strong businesses with significant income, check out this free list of companies with good balance sheets and impressive returns on equity
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This Simply Wall St article is general in nature. It is not a recommendation to buy or sell stocks, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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