Returns At Iridium Communications (NASDAQ:IRDM) Are On The Way Up

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Iridium Communications' (NASDAQ:IRDM) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Iridium Communications is:

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

0.079 = US$205m ÷ (US$2.7b - US$118m) (Based on the trailing twelve months to June 2024).

So, Iridium Communications has an ROCE of 7.9%. On its own, that's a low figure but it's around the 9.3% average generated by the Telecom industry.

Check out our latest analysis for Iridium Communications

In the above chart we have measured Iridium Communications' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Iridium Communications .

What Does the ROCE Trend For Iridium Communications Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Iridium Communications. The data shows that returns on capital have increased by 3,496% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 28% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Iridium Communications may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On Iridium Communications' ROCE

In the end, Iridium Communications has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 19% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

If you want to know some of the risks facing Iridium Communications we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Iridium Communications may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list 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.