U.S. Markets close in 2 hrs 54 mins
  • S&P 500

    4,158.53
    -26.94 (-0.64%)
     
  • Dow 30

    34,032.05
    -168.62 (-0.49%)
     
  • Nasdaq

    13,880.20
    -172.14 (-1.23%)
     
  • Russell 2000

    2,221.69
    -40.98 (-1.81%)
     
  • Crude Oil

    63.35
    +0.22 (+0.35%)
     
  • Gold

    1,771.80
    -8.40 (-0.47%)
     
  • Silver

    25.80
    -0.31 (-1.17%)
     
  • EUR/USD

    1.2045
    +0.0065 (+0.5420%)
     
  • 10-Yr Bond

    1.5910
    +0.0180 (+1.14%)
     
  • Vix

    18.29
    +2.04 (+12.55%)
     
  • GBP/USD

    1.3985
    +0.0146 (+1.0517%)
     
  • USD/JPY

    108.0730
    -0.7100 (-0.6527%)
     
  • BTC-USD

    54,765.55
    -715.66 (-1.29%)
     
  • CMC Crypto 200

    1,231.24
    -67.71 (-5.21%)
     
  • FTSE 100

    7,000.08
    -19.45 (-0.28%)
     
  • Nikkei 225

    29,685.37
    +2.00 (+0.01%)
     

Does InterDigital, Inc.'s (NASDAQ:IDCC) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.

InterDigital (NASDAQ:IDCC) has had a great run on the share market with its stock up by a significant 17% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study InterDigital's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for InterDigital

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

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

6.6% = US$53m ÷ US$803m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.07.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

InterDigital's Earnings Growth And 6.6% ROE

When you first look at it, InterDigital's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 11% either. Given the circumstances, the significant decline in net income by 30% seen by InterDigital over the last five years is not surprising. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared InterDigital's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 30% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is IDCC worth today? The intrinsic value infographic in our free research report helps visualize whether IDCC is currently mispriced by the market.

Is InterDigital Making Efficient Use Of Its Profits?

InterDigital has a high three-year median payout ratio of 74% (that is, it is retaining 26% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run.

Moreover, InterDigital has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on InterDigital. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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.

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