Can Emirates Integrated Telecommunications Company PJSC (DFM:DU) Turn Things Around?

When researching a stock for investment, what can tell us that the company is 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Emirates Integrated Telecommunications Company PJSC (DFM:DU), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Emirates Integrated Telecommunications Company PJSC:

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

0.10 = د.إ1.1b ÷ (د.إ16b - د.إ5.0b) (Based on the trailing twelve months to December 2020).

So, Emirates Integrated Telecommunications Company PJSC has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.4% generated by the Telecom industry.

View our latest analysis for Emirates Integrated Telecommunications Company PJSC

In the above chart we have measured Emirates Integrated Telecommunications Company 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 Emirates Integrated Telecommunications Company PJSC here for free.

How Are Returns Trending?

In terms of Emirates Integrated Telecommunications Company PJSC's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 32% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Emirates Integrated Telecommunications Company PJSC becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these concerning fundamentals, the stock has performed strongly with a 48% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 2 warning signs for Emirates Integrated Telecommunications Company PJSC you'll probably want to know about.

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