Afya Ltd (NASDAQ:AFYA) Emerges as a Top Quality Investment Candidate

Brazilian medical education group Afya Ltd-Class A (NASDAQ:AFYA) has appeared as a notable option for quality investors following a screen based on the Caviar Cruise methodology. This investment process focuses on finding companies with solid historical performance, high profitability, good financial condition, and lasting competitive strengths. The strategy uses measurable filters to identify businesses suitable for long-term ownership, focusing on strong revenue growth, increasing profit margins, high returns on capital, and effective cash conversion.

Revenue and Profitability Growth

The Caviar Cruise methodology places significant importance on steady growth, requiring minimum 5% annual increase in both revenue and EBIT over five years. While Afya's 5-year revenue growth data is not available, the company shows notable operational performance through other measures:

• EBIT growth CAGR of 37.58% over five years is much higher than the 5% minimum
• Recent revenue growth of 15.60% year-over-year shows continued increase
• Operating margin of 32.42% is in the top 3% of industry peers

This notable profitability path suggests Afya has pricing influence and operational effectiveness, key characteristics quality investors look for. The company's capacity to grow earnings more quickly than revenue points to better operational leverage, often coming from economies of scale or competitive strengths that permit premium pricing.

Return on Invested Capital

Return on invested capital is a central measure for quality investing, showing how well management uses capital to create profits. Afya performs well in this important area:

• ROIC excluding cash, goodwill, and intangibles of 166.98% is much greater than the 15% minimum requirement
• Current ROIC of 12.57% is better than 89.61% of industry competitors
• ROIC has risen from its 3-year average of 9.34%, showing better capital efficiency

These high returns show Afya's ability to create significant profits from its invested capital, a sign of quality businesses with lasting competitive advantages and capable management teams.

Financial Health and Cash Flow

Quality investing focuses on financial stability and cash generation abilities. Afya shows several positives in this area:

• Debt-to-free cash flow ratio of 2.94 years is inside the acceptable 0-5 year range
• Profit quality averaging 151.27% over five years is above the 75% minimum
• Positive cash flow from operations kept over the past five years

The company's good free cash flow creation relative to debt allows for financial flexibility and lowers risk, while the high profit quality shows Afya turns accounting profits into actual cash effectively, an important factor for long-term investors.

Valuation and Growth Prospects

While quality investors usually choose business quality over low valuation, Afya offers a good mix of both:

• P/E ratio of 8.21 is positive compared to industry average of 26.79
• Price-to-free cash flow ratio is lower than 94.81% of industry peers
• Analysts predict 9.37% annual revenue growth and 9.24% EPS growth forward

The company's fair valuation multiples, together with expected continued growth, suggest investors are not paying high premiums for this quality business, possibly offering a margin of safety in purchase.

Fundamental Analysis Summary

Afya's full fundamental analysis report gives the company a score of 6 out of 10, noting several main positives:

• High profitability rating of 8/10 with industry-leading margins
• Good growth score of 7/10 supported by historical and predicted increase
• Positive valuation rating of 8/10 showing reasonable pricing
• Some points in financial health (4/10) mainly connected to liquidity ratios

The complete fundamental analysis report offers more detail into Afya's financial position and competitive place within the diversified consumer services industry.

Investment Considerations

Beyond the numerical measures, quality investors should think about several non-numerical factors related to Afya's business model. The company gains from the long-term movement toward healthcare education growth in Brazil, runs a fairly clear business model centered on medical education, and serves a necessary sector with steady demand. However, investors should watch the company's liquidity position and assess management's capital allocation choices over time.

For investors wanting to find more companies that meet the Caviar Cruise quality standards, the full screen results can be seen through this link: View Caviar Cruise Screen Results

Disclaimer: This analysis is based on publicly available information and is provided for educational purposes only. It does not constitute investment advice, nor does it recommend any specific investment action. Investors should conduct their own research and consult with financial advisors before making investment decisions.