Returns On Capital Are Showing Encouraging Signs At Etihad Etisalat (TADAWUL:7020)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Etihad Etisalat (TADAWUL:7020) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Etihad Etisalat:

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

0.057 = ر.س1.6b ÷ (ر.س38b - ر.س11b) (Based on the trailing twelve months to September 2021).

Thus, Etihad Etisalat has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Wireless Telecom industry average of 8.5%.

Check out our latest analysis for Etihad Etisalat

Above you can see how the current ROCE for Etihad Etisalat 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 Etihad Etisalat.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 23%. So we're very much inspired by what we're seeing at Etihad Etisalat thanks to its ability to profitably reinvest capital.

One more thing to note, Etihad Etisalat has decreased current liabilities to 28% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From Etihad Etisalat's ROCE

To sum it up, Etihad Etisalat has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 56% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Etihad Etisalat, we've discovered 2 warning signs that you should be aware of.

While Etihad Etisalat 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.

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.

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