Apple Inc., (NASDAQ:AAPL) Delivered a 39% Return on Capital Employed - Fundamental Review

By
Goran Damchevski
Published
June 28, 2021
NasdaqGS:AAPL

As investors might be aware, Apple Inc., ( NASDAQ:AAPL ) has released their new line of iPhones which support 5G technology and is dedicated to continue innovating hardware and operating system capabilities.

Apple is also focused on optimizing their play store for small businesses and developers, they are ensuring more privacy for users and even more supplementary services for their products, such as expanded arcade games, better FaceTime experience, global podcast availability, new fitness+ episodes, and plenty of other features.

New M1 chips, privacy, 5G and quality improvement are at the center of Apple’s focus.

Within the company, Apple is working to ensure a steady supply of electronics and utilize even more of their own capacities in component production.

To that end, Apple acquired a large stake in Intel’s smartphone modem business. With this move, Apple will hold over 17,000 wireless technology patents and will use them to bolster production and cut reliance on third-party manufacturers.

We should also remember that the field is highly competitive, and Apple outlines that other companies are cutting prices and aggressively competing for market share. Some competitors may even adopt unprofitable strategies just to gain market adaptation.

Recent Performance Overview

Apple posted a second quarter record revenue of US$ 89.6b, up 54 % year over year. When translating this growth for the last twelve months, we get a 21% ttm revenue growth rate.

International sales accounted for 67% of the quarter’s revenue, giving Apple even more significance on their global product adaptation. Interestingly, the Greater China and Asia ex China & Japan segment net sales grew by 87% and 94% respectively.

The full geographic sales allocation can be seen in the chart below.

NASDAQ:AAPL Geo-Segment Sales, Second Quarter 2021

Conversely, we took a look at the performance of the net-sales by category, and broke it down in the chart below.

NASDAQ:AAPL Net Sales by Category, Second Quarter End 2021

As we can see, the iPhone leads as the top-selling product line, with services following.

The services portion makes up mostly sales from the App Store and is targeted both by competitors and antitrust allegations.

The main competitor for the services is currently Google’s ( NASDAQ:GOOG.L ) PlayStore, but recently Microsoft ( NASDAQ:MSFT ) has announced the Microsoft developer store with low 12% to 15% margins and integrated within their new announced operating system - Windows 11. This might be a significant entry as a future competitor from Microsoft and may put pressure on Apple to solidify their App Store Eco-System or drop margins.

Performance Measure

When evaluating the quality of profits, amongst other things, we'll want to see two things:

  • A growing return on capital employed (ROCE)
  • An expansion in the company's amount of capital employed

This shows us that it's capable on delivering solid returns, able to continually reinvest its earnings back into the business.

What is 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.

Companies finance operations with either debt or equity, and we feel ROCE adequately captures the returns from both investment types.

To calculate this metric for Apple, this is the formula:

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

0.39 = US$89b ÷ (US$337b - US$106b) (Based on the trailing twelve months to March 2021).

Thus, Apple has an ROCE of 39%. That's a fantastic return and not only that, it outpaces the average of 6.1% earned by companies in a similar industry.

Check out our latest analysis for Apple

roce
NasdaqGS:AAPL Return on Capital Employed, June 2021

Above, you can see how the current ROCE for Apple compares to its prior returns on capital, but there's only so much you can tell from the past.

Additionaly, ROCE can be compared to Apple’s cost of capital.

This is a bit more complicated to calculate and analysts come up with different estimates. We estimated Apple’s cost of capital around 7.5%.

In simplified terms, if the return on capital employed is larger than the cost of capital, then investors can be satisfied knowing that the company is efficiently delivering profits and making smart investment decisions.

With Apple, that is very much the case, since the ROCE is 39% while the cost of capital sits around 7.5%

The Trend Of ROCE

Apple is showing promise, given that its ROCE is trending up and to the right.

The figures show that over the last five years, ROCE has grown 37% whilst employing roughly the same amount of capital. Basically, the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies.

Conclusion

Apple is collecting higher returns from the same amount of capital and way above its cost of capital.

That's a very impressive performance.

And with the stock having performed exceptionally well over the last five years - netting a total return of 494%, these patterns are being accounted for by investors.

From the perspective of shareholders, Apple seems to have a proven track record of making the right decisions, and inspires confidence that it can outperform price-aggressive competition. Any hits sustained by competitive new technologies or possible antitrust penalties have the capacity to be outgrown by current and new products.

With that being said, we still think the promising fundamentals mean the company deserves some further due diligence and investor should know that we analyzed a small portion of the company’s current and future performance.

For a more complete overview, please view the full profile and consult Apple’s investor relations.

High returns are a key ingredient to strong performance, so check out our free list of stocks earning high returns on equity with solid balance sheets.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article 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.
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