Under The Bonnet, InterDigital's (NASDAQ:IDCC) Returns Look Impressive

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of InterDigital (NASDAQ:IDCC) looks great, so lets see what the trend can tell us.

What Is 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. The formula for this calculation on InterDigital is:

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

0.29 = US$298m ÷ (US$1.7b - US$712m) (Based on the trailing twelve months to September 2024).

Thus, InterDigital has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Software industry average of 8.9%.

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're interested, you can view the analysts predictions in our free analyst report for InterDigital .

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at InterDigital. The data shows that returns on capital have increased by 2,222% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 22% less capital than it was five years ago. InterDigital may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

What We Can Learn From InterDigital's ROCE

From what we've seen above, InterDigital has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a staggering 294% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.

InterDigital does have some risks though, and we've spotted 2 warning signs for InterDigital that you might be interested in.

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.