Emirates Integrated Telecommunications Company PJSC (DFM:DU) Could Be At Risk Of Shrinking As A Company

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Emirates Integrated Telecommunications Company PJSC (DFM:DU), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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 Integrated Telecommunications Company PJSC, this is the formula:

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

0.10 = د.إ1.1b ÷ (د.إ17b - د.إ5.9b) (Based on the trailing twelve months to December 2021).

Therefore, Emirates Integrated Telecommunications Company PJSC has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

Check out our latest analysis for Emirates Integrated Telecommunications Company PJSC

Above you can see how the current ROCE for Emirates Integrated Telecommunications Company PJSC compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Emirates Integrated Telecommunications Company PJSC here for free.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Emirates Integrated Telecommunications Company PJSC. Unfortunately the returns on capital have diminished from the 33% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Emirates Integrated Telecommunications Company PJSC to turn into a multi-bagger.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 41% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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

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.