If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. And in light of that, the trends we're seeing at InterDigital's (NASDAQ:IDCC) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on InterDigital is:

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

0.34 = US$320m ÷ (US$1.6b - US$699m) (Based on the trailing twelve months to June 2024).

Therefore, InterDigital has an ROCE of 34%. In absolute terms that's a great return and it's even better than the Software industry average of 8.6%.

Above you can see how the current ROCE for InterDigital 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 InterDigital for free.

What Can We Tell From InterDigital's ROCE Trend?

InterDigital has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 1,641% over the trailing five years. The company is now earning US$0.3 per dollar of capital employed. In regards to capital employed, InterDigital appears to been achieving more with less, since the business is using 28% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 43% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.

Our Take On 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. And a remarkable 177% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.