The Return Trends At Iridium Communications (NASDAQ:IRDM) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Iridium Communications' (NASDAQ:IRDM) 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 Iridium Communications:

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

0.047 = US$119m ÷ (US$2.7b - US$132m) (Based on the trailing twelve months to December 2023).

Therefore, Iridium Communications has an ROCE of 4.7%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.

View our latest analysis for Iridium Communications

Above you can see how the current ROCE for Iridium Communications compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Iridium Communications .

What Does the ROCE Trend For Iridium Communications Tell Us?

While the ROCE is still rather low for Iridium Communications, we're glad to see it heading in the right direction. We found that the returns on capital employed over the last five years have risen by 324%. 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 33% less capital than it was five years ago. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

The Key Takeaway

In a nutshell, we're pleased to see that Iridium Communications has been able to generate higher returns from less capital. Since the stock has only returned 8.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Iridium Communications does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.