Capital Allocation Trends At Emirates Integrated Telecommunications Company PJSC (DFM:DU) Aren't Ideal

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Emirates Integrated Telecommunications Company PJSC (DFM:DU) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Emirates Integrated Telecommunications Company PJSC is:

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

0.11 = د.إ1.2b ÷ (د.إ17b - د.إ6.6b) (Based on the trailing twelve months to March 2022).

So, Emirates Integrated Telecommunications Company PJSC has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Telecom industry.

See 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?

There is reason to be cautious about Emirates Integrated Telecommunications Company PJSC, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 36% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Emirates Integrated Telecommunications Company PJSC to turn into a multi-bagger.

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

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 40% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing, we've spotted 1 warning sign facing Emirates Integrated Telecommunications Company PJSC that you might find interesting.

While Emirates Integrated Telecommunications Company PJSC isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.