What These Trends Mean At Emirates Integrated Telecommunications Company PJSC (DFM:DU)

What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Emirates Integrated Telecommunications Company PJSC (DFM:DU), the trends above didn't look too great.

What is 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)

0.12 = د.إ1.3b ÷ (د.إ16b - د.إ4.6b) (Based on the trailing twelve months to September 2020).

Thus, Emirates Integrated Telecommunications Company PJSC has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Telecom industry average of 9.7% it's much better.

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'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. About five years ago, returns on capital were 32%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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

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. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 50% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Emirates Integrated Telecommunications Company PJSC does have some risks though, and we've spotted 2 warning signs for Emirates Integrated Telecommunications Company PJSC that you might be interested in.

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.

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