Investors Met With Slowing Returns on Capital At Emirates Telecommunications Group Company PJSC (ADX:EAND)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Emirates Telecommunications Group Company PJSC (ADX:EAND), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Emirates Telecommunications Group Company PJSC:

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

0.15 = د.إ12b ÷ (د.إ147b - د.إ64b) (Based on the trailing twelve months to March 2023).

Therefore, Emirates Telecommunications Group Company PJSC has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 11% it's much better.

See our latest analysis for Emirates Telecommunications Group Company PJSC

Above you can see how the current ROCE for Emirates Telecommunications Group Company PJSC compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

Things have been pretty stable at Emirates Telecommunications Group Company PJSC, with its capital employed and returns on that capital staying somewhat the same for the last five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Emirates Telecommunications Group Company PJSC in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger. That probably explains why Emirates Telecommunications Group Company PJSC has been paying out 74% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

On a side note, Emirates Telecommunications Group Company PJSC's current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Emirates Telecommunications Group Company PJSC's ROCE

In a nutshell, Emirates Telecommunications Group Company PJSC has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 59% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Emirates Telecommunications Group Company PJSC does come with some risks, and we've found 1 warning sign that you should be aware of.

While Emirates Telecommunications Group Company PJSC 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.