We Like These Underlying Return On Capital Trends At Airtel Africa (LON:AAF)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Airtel Africa (LON:AAF) and its trend of ROCE, we really liked what we saw.

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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. The formula for this calculation on Airtel Africa is:

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

0.19 = US$1.4b ÷ (US$11b - US$4.0b) (Based on the trailing twelve months to December 2024).

Therefore, Airtel Africa has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Wireless Telecom industry.

See our latest analysis for Airtel Africa

In the above chart we have measured Airtel Africa's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Airtel Africa .

The Trend Of ROCE

Airtel Africa is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 54% whilst employing roughly the same amount of capital. 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.

The Key Takeaway

In summary, we're delighted to see that Airtel Africa has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 461% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Airtel Africa does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While Airtel Africa may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.