Can Afrimat (JSE:AFT) Prolong Its Impressive Returns?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. That's why when we briefly looked at Afrimat's (JSE:AFT) ROCE trend, we were very happy with what we saw.

What is Return On Capital Employed (ROCE)?

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 Afrimat is:

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

0.27 = R646m ÷ (R3.1b - R658m) (Based on the trailing twelve months to August 2020).

So, Afrimat has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Basic Materials industry average of 14%.

View our latest analysis for Afrimat

Historical performance is a great place to start when researching a stock so above you can see the gauge for Afrimat's ROCE against it's prior returns. If you're interested in investigating Afrimat's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Afrimat Tell Us?

Afrimat deserves to be commended in regards to it's returns. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 103% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Key Takeaway

Afrimat has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. Therefore it's no surprise that shareholders have earned a respectable 89% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Before jumping to any conclusions though, we need to know what value we're getting for the current share price. That's where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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