Stock Analysis

Returns On Capital At Dubai Investments PJSC (DFM:DIC) Have Stalled

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What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Dubai Investments PJSC (DFM:DIC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Dubai Investments PJSC is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.026 = د.إ456m ÷ (د.إ20b - د.إ3.2b) (Based on the trailing twelve months to December 2022).

So, Dubai Investments PJSC has an ROCE of 2.6%. Even though it's in line with the industry average of 2.5%, it's still a low return by itself.

View our latest analysis for Dubai Investments PJSC

DFM:DIC Return on Capital Employed May 7th 2023

In the above chart we have measured Dubai Investments PJSC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Dubai Investments PJSC here for free.

SWOT Analysis for Dubai Investments PJSC

  • Earnings growth over the past year exceeded the industry.
  • Net debt to equity ratio below 40%.
  • Dividend is in the top 25% of dividend payers in the market.
  • Interest payments on debt are not well covered.
  • Expensive based on P/E ratio and estimated fair value.
  • DIC's financial characteristics indicate limited near-term opportunities for shareholders.
  • Debt is not well covered by operating cash flow.
  • Dividends are not covered by cash flow.

What Can We Tell From Dubai Investments PJSC's ROCE Trend?

There hasn't been much to report for Dubai Investments PJSC's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Dubai Investments PJSC doesn't end up being a multi-bagger in a few years time. That being the case, it makes sense that Dubai Investments PJSC has been paying out 74% of its earnings to its shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

In Conclusion...

In summary, Dubai Investments PJSC isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Dubai Investments PJSC does have some risks, we noticed 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Dubai Investments PJSC is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.