What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Iridium Communications (NASDAQ:IRDM), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.016 = US$44m ÷ (US$2.8b - US$124m) (Based on the trailing twelve months to June 2023).

So, Iridium Communications has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 6.4%.

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 here for free.

So How Is Iridium Communications' ROCE Trending?

In terms of Iridium Communications' historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 1.6% we see today. In addition to that, Iridium Communications is now employing 31% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

In summary, it's unfortunate that Iridium Communications is shrinking its capital base and also generating lower returns. Yet despite these poor fundamentals, the stock has gained a huge 114% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Iridium Communications, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Iridium Communications may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.