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Here’s why Apogee Enterprises, Inc.’s (NASDAQ:APOG) Returns On Capital Matters So Much

Simply Wall St

Today we'll look at Apogee Enterprises, Inc. (NASDAQ:APOG) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Apogee Enterprises:

0.087 = US$67m ÷ (US$1.1b - US$371m) (Based on the trailing twelve months to August 2019.)

So, Apogee Enterprises has an ROCE of 8.7%.

See our latest analysis for Apogee Enterprises

Does Apogee Enterprises Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Apogee Enterprises's ROCE appears meaningfully below the 13% average reported by the Building industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Apogee Enterprises stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

Apogee Enterprises's current ROCE of 8.7% is lower than its ROCE in the past, which was 22%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Apogee Enterprises's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:APOG Past Revenue and Net Income, December 4th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Apogee Enterprises.

How Apogee Enterprises's Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Apogee Enterprises has total assets of US$1.1b and current liabilities of US$371m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Apogee Enterprises has a medium level of current liabilities, which would boost its ROCE somewhat.

Our Take On Apogee Enterprises's ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.