Afya Limited (AFYA) Cash Flow Statement

The OCF/NI ratio averaged well above 1.0x across the ten quarters, with 2024Q3 hitting 4.01x, suggesting that reported net income consistently understates cash generation, likely due to non-cash charges like D&A and amortization of intangibles from acquisitions. However, the wide quarterly swings in OCF/NI, from 1.01x in 2026Q2 to 3.26x in 2025Q3, indicate that working capital movements and seasonal tuition collections drive significant variability, so investors should focus on trailing twelve-month figures rather than any single quarter. The gap between net income and operating cash flow is positive and persistent, but the magnitude fluctuates sharply, implying that earnings quality is high but not smooth, warranting a normalized view.

FCF margins are consistently positive and often exceed 40% in Q1 quarters, driven by high operating cash flow and modest capex, but dip in Q2 and Q4 when working capital absorbs cash. The 2026Q2 FCF margin of 17.4% is below the 2025Q2 level of 19.5%, suggesting a slight deceleration in cash generation relative to revenue, though the absolute FCF of $173.3M remains substantial. This pattern indicates that Afya's cash flow is structurally strong but not smooth, and investors should annualize rather than extrapolate quarterly figures. The trajectory appears stable, with no evidence of deterioration in the underlying cash-generating ability of the business, but the quarterly volatility demands a longer-term lens.

Capex/Revenue has trended upward from the low 3% levels in early 2024 to 7.9% in 2026Q2, with a notable spike to 11.3% in 2025Q4, suggesting Afya is investing more heavily in campus expansion and digital platform development. This elevated capex may reflect growth-oriented spending on new medical seats and technology, rather than pure maintenance, given the company's history of M&A and seat maturation. The increase in capital intensity could pressure near-term FCF margins, but if it supports seat growth and digital monetization, it may enhance long-term cash generation. Investors should monitor whether this capex uptick translates into higher revenue and cash flow, as the current level remains manageable relative to operating cash flow.

The working capital line is the primary source of quarterly OCF volatility, with negative changes (cash outflows) in most quarters, particularly in Q2 and Q4, likely reflecting tuition payment cycles and FIES receivables timing. Positive changes in 2025Q3 and 2024Q3 suggest periods of strong collections, but the overall pattern points to a business that requires careful management of receivables, especially given the government-linked FIES program. The consistent negative working capital changes in recent quarters may indicate a lengthening cash conversion cycle, which warrants monitoring for potential collection pressure. While the swings are seasonal, the persistent negative changes in 2026 suggest that Afya is absorbing cash into working capital, which could temper FCF growth if not reversed.

The cash flow statement reveals a dual strategy: returning capital via share repurchases, which have been consistent at roughly $67M per quarter since 2025Q4, and pursuing acquisitions, with notable outflows in 2024Q3 and 2026Q1. Dividends were paid only in 2025Q2 ($129M) and 2025Q4 ($143M), suggesting an irregular but growing shareholder return program. The heavy acquisition spending, particularly the $445.4M outflow in 2024Q3, indicates that management is prioritizing inorganic growth, which may strain liquidity if not offset by strong operating cash flow. Investors should assess whether the pace of M&A and buybacks is sustainable given the working capital demands, as the combination could pressure the balance sheet if cash generation slows.

The cumulative gap of roughly $1.69B between operating cash flow and net income is substantial, reflecting the impact of non-cash charges such as D&A and amortization of intangibles from acquisitions, which depress net income but do not affect cash. This divergence suggests that Afya's reported earnings are conservative, and the company's true cash-generating ability is stronger than net income implies. However, the gap also highlights the importance of adjusting for acquisition-related amortization when valuing the company, as the cash flow may not be fully sustainable if growth capex and working capital needs increase. The persistent positive divergence supports a higher quality-of-earnings assessment, but investors should be cautious about extrapolating the gap indefinitely, as it may narrow if acquisition activity slows or amortization declines.