To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Iridium Communications (NASDAQ:IRDM) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Iridium Communications:

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

0.079 = 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%. In absolute terms, that's a low return but it's around the Telecom industry average of 9.3%.

Check out 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'd like, you can check out the forecasts from the analysts covering Iridium Communications for free.

What The Trend Of ROCE Can Tell Us

Iridium Communications has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 3,496% 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. In regards to capital employed, Iridium Communications appears to been achieving more with less, since the business is using 28% less capital to run its operation. 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.

What We Can Learn From Iridium Communications' ROCE

From what we've seen above, Iridium Communications has managed to increase it's returns on capital all the while reducing it's capital base. Considering the stock has delivered 34% 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 with that in mind, we think the stock deserves further research.

One more thing: We've identified 3 warning signs with Iridium Communications (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Iridium Communications 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.