This only works if $caching is set to TRUE, see the caching section for more info.
You can also pass a $cache_id as an optional second parameter in case you want multiple caches for the given template.
You can supply a $compile id as an optional third parameter. If you omit that parameter the persistent $compile_id is used if its set.
If you do not want to pass a $cache_id but want to pass a $compile_id you have to pass NULL as a $cache_id.
Technical Note: If is_cached() returns TRUE it actually loads the cached output and stores it internally. Any subsequent call to display() or fetch() will return this internally stored output and does not try to reload the cache file. This prevents a race condition that may occur when a second process clears the cache between the calls to is_cached() and to display() in the example above. This also means calls to clear_cache() and other changes of the cache-settings may have no effect after is_cached() returned TRUE.
See also clear_cache(), clear_all_cache(), and caching section.