Capital allocation trends at Emirates Integrated Telecommunications Company PJSC (DFM:DU) are less than ideal

To avoid investing in a declining business, there are a few financial metrics that can provide early indications of aging. Generally, we will see the trend of both come back on capital employed (ROCE) falling and this usually coincides with a falling amount capital employed. Such trends ultimately mean that the company reduces its investments and also earns less on what it has invested. That said, after a quick look, Emirates Integrated Telecommunications Company PJSC (DFM:DU) we are not filled with optimism, but deep in our research.

Understanding return on capital employed (ROCE)

For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Emirates Integrated Telecommunications Company PJSC is:

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

0.11 = Ï.å1.2b ÷ (Ï.å17b – ï.å6.6b) (Based on the last twelve months to March 2022).

So, Emirates Integrated Telecommunications Company PJSC has a ROCE of 11%. It’s a relatively normal return on capital, and it’s around the 10% generated by the telecom industry.

See our latest analysis for Emirates Integrated Telecommunications Company PJSC

DFM: DU Return on Capital Employed July 7, 2022

In the chart above, we measured the past ROCE of Emirates Integrated Telecommunications Company PJSC against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering Emirates Integrated Telecommunications Company PJSC here for free.

What is the return trend?

There is reason to be cautious about Emirates Integrated Telecommunications Company PJSC as yields tend to fall. Unfortunately, capital returns have declined from the 36% they earned five years ago. Meanwhile, the capital employed in the company remained roughly stable over the period. This combination may be a sign of a mature business that still has areas to deploy capital, but the returns received are not as high due potentially to new competition or lower margins. If these trends continue, we do not expect Emirates Integrated Telecommunications Company PJSC to turn into a multi-bagger.

What we can learn from the ROCE of Emirates Integrated Telecommunications Company PJSC

Overall, lower returns from the same amount of capital employed are not exactly signs of a compounding machine. Despite this, the stock has generated a 40% return for shareholders who have held it over the past five years. Either way, we’re not big fans of current trends, so we think you might find better investments elsewhere.

One more thing we spotted 1 warning sign deal with Emirates Integrated Telecommunications Company PJSC which might be of interest to you.

Although Emirates Integrated Telecommunications Company PJSC does not get the highest return, check this free list of companies that achieve high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Sean B. Jackson