Iridium Communications (NASDAQ: IRDM) may struggle to allocate capital
When it comes to investing, there are some useful financial metrics that can alert us when a business is potentially in trouble. Typically we will see the trend of both to return to on capital employed (ROCE) declining and this generally coincides with a decrease quantity capital employed. Basically, the business earns less on its investments and it also reduces its total assets. So after taking a look at the trends within Iridium communication (NASDAQ: IRDM), we weren’t too hopeful.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. Analysts use this formula to calculate it for Iridium Communications:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.013 = US $ 41 million ÷ (US $ 3.2 billion – US $ 93 million) (Based on the last twelve months up to September 2021).
Therefore, Iridium Communications posted a ROCE of 1.3%. In absolute terms, this is a low return and it is also below the telecom industry average of 8.8%.
NasdaqGS: IRDM Return on Capital Employed December 12, 2021
Above you can see how Iridium Communications’ current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Iridium Communications.
So what’s the IRIDium Communications ROCE trend?
We are a little worried about the evolution of returns on capital at Iridium Communications. Unfortunately, returns on capital have fallen from the 5.3% they earned five years ago. In addition to this, it should be noted that the amount of capital employed within the company has remained relatively stable. Companies that exhibit these attributes tend not to shrink, but they may be mature and face pressure on their margins from the competition. So, because these trends are generally not conducive to building a multi-bagger, we won’t hold our breath on Iridium Communications becoming one if things continue as they have.
The bottom line
In summary, it is unfortunate that Iridium Communications generates lower returns from the same amount of capital. The market must be optimistic about the future of the stock because while the underlying trends are not very encouraging, the stock has climbed 310%. Either way, the current underlying trends do not bode well for long term performance so unless they reverse we would start looking elsewhere.
One last thing to note, we have identified 1 warning sign with Iridium Communications and understand that this should be part of your investment process.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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