Returns On Capital Signal Difficult Times Ahead For APG|SGA (VTX:APGN)

By
Simply Wall St
Published
May 15, 2021
SWX:APGN
Source: Shutterstock

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at APG|SGA (VTX:APGN), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for APG|SGA, this is the formula:

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

0.10 = CHF10m ÷ (CHF205m - CHF106m) (Based on the trailing twelve months to December 2020).

Thus, APG|SGA has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 8.8% generated by the Media industry.

Check out our latest analysis for APG|SGA

roce
SWX:APGN Return on Capital Employed May 16th 2021

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?

In terms of APG|SGA's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 43% five years ago but has since fallen to 10%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 36% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, APG|SGA's current liabilities are still rather high at 52% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

APG|SGA does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While APG|SGA 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. 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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