Shareholders Would Enjoy A Repeat Of Afarak Group's (HEL:AFAGR) Recent Growth In Returns

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, the ROCE of Afarak Group (HEL:AFAGR) looks great, so lets see what the trend can tell us.

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, this is the formula:

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

0.23 = €30m ÷ (€172m - €40m) (Based on the trailing twelve months to June 2022).

So, Afarak Group has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 14%.

Check out our latest analysis for Afarak Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Afarak Group's ROCE against it's prior returns. If you'd like to look at how Afarak Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Afarak Group Tell Us?

We're pretty happy with how the ROCE has been trending at Afarak Group. We found that the returns on capital employed over the last five years have risen by 413%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 43% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

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. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was five years ago. 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.

What We Can Learn From Afarak Group's ROCE

In a nutshell, we're pleased to see that Afarak Group has been able to generate higher returns from less capital. Given the stock has declined 55% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Afarak Group (of which 1 is concerning!) that you should know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.