Yahoo Finance Afterpay (ASX:APT) Is Looking To Continue Growing Its 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Afterpay (ASX:APT) so let's look a bit deeper.
Understanding 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. Analysts use this formula to calculate it for Afterpay:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = AU$29m ÷ (AU$2.1b - AU$219m) (Based on the trailing twelve months to December 2020).
Therefore, Afterpay has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.
See our latest analysis for Afterpay
In the above chart we have measured Afterpay'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 report on analyst forecasts for the company.
What Can We Tell From Afterpay's ROCE Trend?
Afterpay has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 1.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Afterpay is utilizing 9,823% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
Our Take On Afterpay's ROCE
In summary, it's great to see that Afterpay has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 1,134% total return over the last three years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Afterpay can keep these trends up, it could have a bright future ahead.
One final note, you should learn about the 3 warning signs we've spotted with Afterpay (including 1 which is concerning) .
While Afterpay isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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