Returns Are Gaining Momentum At Afarak Group Oyj (HEL:AFAGR)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Afarak Group Oyj's (HEL:AFAGR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Afarak Group Oyj, this is the formula:

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

0.065 = €6.7m ÷ (€146m - €44m) (Based on the trailing twelve months to December 2021).

So, Afarak Group Oyj has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 13%.

See our latest analysis for Afarak Group Oyj

Historical performance is a great place to start when researching a stock so above you can see the gauge for Afarak Group Oyj's ROCE against it's prior returns. If you're interested in investigating Afarak Group Oyj's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Afarak Group Oyj's ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Afarak Group Oyj. We found that the returns on capital employed over the last five years have risen by 1,125%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, Afarak Group Oyj appears to been achieving more with less, since the business is using 56% less capital to run its operation. Afarak Group Oyj may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 30% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

Our Take On Afarak Group Oyj's ROCE

From what we've seen above, Afarak Group Oyj has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 47% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing to note, we've identified 2 warning signs with Afarak Group Oyj and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.