Investors Shouldn't Overlook Airtel Africa's (LON:AAF) Impressive Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Airtel Africa (LON:AAF) looks great, so lets see what the trend can tell us.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Airtel Africa:

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

0.21 = US$1.5b ÷ (US$10b - US$2.8b) (Based on the trailing twelve months to December 2021).

Therefore, Airtel Africa has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 8.3% earned by companies in a similar industry.

See our latest analysis for Airtel Africa

Above you can see how the current ROCE for Airtel Africa compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Airtel Africa here for free.

So How Is Airtel Africa's ROCE Trending?

Investors would be pleased with what's happening at Airtel Africa. The data shows that returns on capital have increased substantially over the last four years to 21%. The amount of capital employed has increased too, by 59%. So we're very much inspired by what we're seeing at Airtel Africa thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 28%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Airtel Africa's ROCE

To sum it up, Airtel Africa has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last year, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Airtel Africa can keep these trends up, it could have a bright future ahead.

On a final note, we've found 2 warning signs for Airtel Africa that we think you should be aware of.

Airtel Africa is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.