The Trends At Afya (NASDAQ:AFYA) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. However, after briefly looking over the numbers, we don't think Afya (NASDAQ:AFYA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Afya is:

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

0.096 = R$334m ÷ (R$4.0b - R$572m) (Based on the trailing twelve months to September 2020).

Thus, Afya has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Consumer Services industry average of 7.4%.

Check out our latest analysis for Afya

In the above chart we have measured Afya's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Afya here for free.

So How Is Afya's ROCE Trending?

We weren't thrilled with the trend because Afya's ROCE has reduced by 36% over the last two years, while the business employed 515% more capital. That being said, Afya raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Afya probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Afya. These growth trends haven't led to growth returns though, since the stock has fallen 10% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Afya does come with some risks, and we've found 1 warning sign that you should be aware of.

While Afya isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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