Yahoo Finance Here's What's Concerning About APG|SGA's (VTX:APGN) Returns On Capital
What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within APG|SGA (VTX:APGN), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on APG|SGA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.28 = CHF24m ÷ (CHF175m - CHF88m) (Based on the trailing twelve months to June 2022).
Therefore, APG|SGA has an ROCE of 28%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.
See our latest analysis for APG|SGA
In the above chart we have measured APG|SGA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering APG|SGA here for free.
What Can We Tell From APG|SGA's ROCE Trend?
We are a bit anxious about the trends of ROCE at APG|SGA. To be more specific, today's ROCE was 56% five years ago but has since fallen to 28%. On top of that, the business is utilizing 22% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
On a separate but related note, it's important to know that APG|SGA has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In summary, it's unfortunate that APG|SGA is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 58% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we've found 2 warning signs for APG|SGA that we think you should be aware of.
APG|SGA is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
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