Emirates Integrated Telecommunications Company PJSC's (DFM:DU) Returns On Capital Tell Us There Is Reason To Feel Uneasy

May 26, 2023

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Emirates Integrated Telecommunications Company PJSC (DFM:DU), we weren't too hopeful.

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 Integrated Telecommunications Company PJSC, this is the formula:

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

0.14 = د.إ1.4b ÷ (د.إ17b - د.إ6.7b) (Based on the trailing twelve months to March 2023).

Thus, Emirates Integrated Telecommunications Company PJSC has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Telecom industry.

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

SWOT Analysis for Emirates Integrated Telecommunications Company PJSC

Strength

Earnings growth over the past year exceeded the industry.

Currently debt free.

Balance sheet summary for DU.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Telecom market.

Opportunity

Annual earnings are forecast to grow for the next 3 years.

Good value based on P/E ratio compared to estimated Fair P/E ratio.

Threat

Dividends are not covered by cash flow.

Annual earnings are forecast to grow slower than the Emirian market.

See DU's dividend history.

What Can We Tell From Emirates Integrated Telecommunications Company PJSC's ROCE Trend?

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. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

The Bottom Line On 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 32% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, 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 may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Valuation is complex, but we're here to simplify it.

Discover if Emirates Integrated Telecommunications Company PJSC might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.