If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Afya's (NASDAQ:AFYA) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.12 = R$940m ÷ (R$8.7b - R$925m) (Based on the trailing twelve months to September 2024).

Therefore, Afya has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Consumer Services industry average of 9.4% it's much better.

View our latest analysis for Afya

Above you can see how the current ROCE for Afya compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Afya .

What The Trend Of ROCE Can Tell Us

Afya is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 12%. The amount of capital employed has increased too, by 204%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Afya's ROCE

All in all, it's terrific to see that Afya is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 46% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

While Afya looks impressive, no company is worth an infinite price. The intrinsic value infographic for AFYA helps visualize whether it is currently trading for a fair price.

While Afya 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.