Returns Are Gaining Momentum At InterDigital (NASDAQ:IDCC)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in InterDigital's (NASDAQ:IDCC) returns on capital, so let's have a look.

Understanding 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 InterDigital:

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

0.17 = US$235m ÷ (US$1.8b - US$445m) (Based on the trailing twelve months to September 2023).

Therefore, InterDigital has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 7.9% it's much better.

View our latest analysis for InterDigital

In the above chart we have measured InterDigital's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering InterDigital here for free.

So How Is InterDigital's ROCE Trending?

InterDigital is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 24% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On InterDigital's ROCE

To sum it up, InterDigital is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 57% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if InterDigital can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 1 warning sign facing InterDigital that you might find interesting.

While InterDigital isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.