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Returns on Capital Paint A Bright Future For Airtel Africa (LON:AAF)
What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 the ROCE trend of Airtel Africa (LON:AAF) we really liked what we saw.
Understanding 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)
0.26 = US$1.5b ÷ (US$9.5b - US$3.7b) (Based on the trailing twelve months to June 2024).
Therefore, Airtel Africa has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 8.8% 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 for free.
The Trend Of ROCE
Airtel Africa is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 123% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
What We Can Learn From Airtel Africa's ROCE
To bring it all together, Airtel Africa has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 161% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.
One more thing, we've spotted 4 warning signs facing Airtel Africa that you might find interesting.
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.
About LSE:AAF
Airtel Africa
Provides telecommunications and mobile money services in Nigeria, East Africa, and Francophone Africa.
Undervalued with high growth potential.