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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think InterDigital (NASDAQ:IDCC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for InterDigital, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$55m ÷ (US$1.6b - US$296m) (Based on the trailing twelve months to December 2020).
So, InterDigital has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Software industry average of 11%.
Above you can see how the current ROCE for InterDigital 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 InterDigital here for free.
How Are Returns Trending?
In terms of InterDigital's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.2% from 19% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On InterDigital's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for InterDigital. These trends are starting to be recognized by investors since the stock has delivered a 32% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
InterDigital does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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