Returns On Capital At Emirates Telecommunications Group Company PJSC (ADX:ETISALAT) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Emirates Telecommunications Group Company PJSC (ADX:ETISALAT), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Emirates Telecommunications Group Company PJSC, this is the formula:

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

0.19 = د.إ15b ÷ (د.إ135b - د.إ57b) (Based on the trailing twelve months to March 2021).

Thus, Emirates Telecommunications Group Company PJSC has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 9.6% it's much better.

View our latest analysis for Emirates Telecommunications Group Company PJSC

In the above chart we have measured Emirates Telecommunications Group Company PJSC's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Emirates Telecommunications Group Company PJSC.

What Does the ROCE Trend For Emirates Telecommunications Group Company PJSC Tell Us?

Over the past five years, Emirates Telecommunications Group Company PJSC's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Emirates Telecommunications Group Company PJSC to be a multi-bagger going forward. That probably explains why Emirates Telecommunications Group Company PJSC has been paying out 87% of its earnings as dividends to shareholders. If the company is in fact lacking growth opportunities, that's one of the viable alternatives for the money.

On a separate but related note, it's important to know that Emirates Telecommunications Group Company PJSC has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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.

What We Can Learn From Emirates Telecommunications Group Company PJSC's ROCE

In summary, Emirates Telecommunications Group Company 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 48% over the last five years, investors must think there's better things to come. 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 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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