Apogee Enterprises (NASDAQ:APOG) Is Very Good At Capital Allocation

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Apogee Enterprises' (NASDAQ:APOG) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Apogee Enterprises is:

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

0.23 = US$154m ÷ (US$889m - US$227m) (Based on the trailing twelve months to June 2024).

Thus, Apogee Enterprises has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Building industry average of 17%.

View our latest analysis for Apogee Enterprises

In the above chart we have measured Apogee Enterprises' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Apogee Enterprises .

What Does the ROCE Trend For Apogee Enterprises Tell Us?

Apogee Enterprises has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 198%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, Apogee Enterprises appears to been achieving more with less, since the business is using 28% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From Apogee Enterprises' ROCE

In the end, Apogee Enterprises has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a solid 62% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Apogee Enterprises that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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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