Returns At Afya (NASDAQ:AFYA) Are On The Way Up

Simply Wall St · 10/18 11:44

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Afya (NASDAQ:AFYA) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Afya:

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

0.13 = R$893m ÷ (R$7.9b - R$974m) (Based on the trailing twelve months to June 2024).

Therefore, Afya has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 7.6% it's much better.

See our latest analysis for Afya

roce
NasdaqGS:AFYA Return on Capital Employed October 18th 2024

Above you can see how the current ROCE for Afya 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 analyst report for Afya .

How Are Returns Trending?

The trends we've noticed at Afya are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 346% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In Conclusion...

To sum it up, Afya has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 34% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

While Afya looks impressive, no company is worth an infinite price. The intrinsic value infographic for AFYA helps visualize whether it is currently trading for a fair price.

While Afya 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.