Emirates Integrated Telecommunications Company PJSC (DFM:DU) May Have Issues Allocating Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Emirates Integrated Telecommunications Company PJSC (DFM:DU), so let's see why.

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. 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)

0.099 = د.إ1.0b ÷ (د.إ16b - د.إ6.1b) (Based on the trailing twelve months to March 2021).

So, Emirates Integrated Telecommunications Company PJSC has an ROCE of 9.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.6%.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

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 34% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. 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.

The Bottom Line

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. Despite the concerning underlying trends, the stock has actually gained 36% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Emirates Integrated Telecommunications Company PJSC does have some risks, we noticed 2 warning signs (and 1 which can't be ignored) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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