Under The Bonnet, Afarak Group's (HEL:AFAGR) Returns Look Impressive

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 the ROCE trend of Afarak Group (HEL:AFAGR) we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Afarak Group is:

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).

Therefore, Afarak Group has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

View 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 want to delve into the historical earnings, revenue and cash flow of Afarak Group, check out these free graphs here.

So How Is Afarak Group's ROCE Trending?

We're pretty happy with how the ROCE has been trending at Afarak Group. The data shows that returns on capital have increased by 413% over the trailing five years. The company is now earning €0.2 per dollar of capital employed. 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. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

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. The current liabilities has increased to 23% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.

The Bottom Line

In the end, Afarak Group has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 67% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a final note, we've found 3 warning signs for Afarak Group that we think you should be aware of.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.