Shares of InterDigital, Inc. (NASDAQ:IDCC) Heading Up: Is the Market Following the Fundamentals?

InterDigital ( NASDAQ:IDCC ) stock is up a whopping 14% over the past month. Given that the market rewards strong financials over the long term, we wonder if that is the case here. In this article, we decided to focus on InterDigital’s ROE.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it receives from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis of InterDigital

How do you calculate return on equity?

of capital return formula is:

Return on equity = Net profit (from continuing operations) Stockholders’ equity

So, based on the formula above, the ROE for InterDigital is:

30% = $189 million $624 million (Based on trailing twelve months to March 2024).

‘Return’ is the amount earned after tax over the last twelve months. This means that for every $1 of equity, the company generated $0.30 in profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an efficient profit-generating measure of a company’s future earnings. Depending on how much of these earnings the company reinvests or “retains” and how effectively it does so, we are able to estimate a company’s earnings growth potential. Assuming everything else remains the same, the higher the ROE and earnings retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.

InterDigital’s earnings growth and 30% ROE

First, we acknowledge that InterDigital has a significantly high ROE. Second, a comparison with the industry-reported ROE average of 12% also does not go unnoticed by us. As a result, the remarkable 47% net income growth InterDigital has seen over the past five years is no surprise.

We then compared InterDigital’s net income growth to the industry and are pleased to see that the company’s growth figure is higher when compared to the industry which has a growth rate of 13% over the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the increase (or decrease) in the company’s expected earnings. Doing so will help them determine whether the future of the stock looks promising or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you might want to check whether InterDigital is trading at a high P/E or a low P/E, relative to its industry.

The story continues

Is InterDigital using its profits efficiently?

The average three-year payout ratio for InterDigital is 49%, which is moderately low. The company is retaining the remaining 51%. From the looks of it, the dividend is well covered and InterDigital is reinvesting its earnings efficiently as evidenced by its remarkable growth we discussed above.

Furthermore, InterDigital has paid dividends for a period of at least ten years which means that the company is quite serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company’s forward earnings ratio is expected to decline to 27% over the next three years.

CONCLUSION

All in all, we are quite satisfied with InterDigital’s performance. In particular, we like that the company is reinvesting a large portion of its earnings at a high rate of return. This has certainly caused the company to see significant growth in its revenue. With that, studying recent analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analyst expectations based on broad expectations for the industry, or on company fundamentals? Click here to be taken to our analyst forecast page for the company.

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This article from 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 into account your financial objectives or situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not include the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in any of the stocks mentioned.