Is Emirates Integrated Telecommunications Company PJSC (DFM:DU) Set To Make A Turnaround?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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. 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?

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. 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)

0.14 = د.إ1.4b ÷ (د.إ14b - د.إ4.3b) (Based on the trailing twelve months to June 2020).

Therefore, Emirates Integrated Telecommunications Company PJSC has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 8.4% it's much better.

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 to see what analysts are forecasting going forward, you should check out our free report for Emirates Integrated Telecommunications Company PJSC.

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

In terms of Emirates Integrated Telecommunications Company PJSC's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 30%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. 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 Key Takeaway

In summary, it's unfortunate that Emirates Integrated Telecommunications Company PJSC is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 43% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching Emirates Integrated Telecommunications Company PJSC, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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