In my previous post, I looked at Google's performance and its declining returns as an example to illustrate that growth doesn't necessarily translate into returns. I wanted to see how Apple has been performing off late and whether it is undervalued as a number of activist investors have been suggesting recently (David Einhorn on CNBC, Carl Icahn on Motley Fool etc.). Here are Apple's return on invested capital and pre-tax marginal return on investment for the past 13 years. As you probably know, return on invested capital measures the returns of a company on its overall investment while marginal pre-tax ROC is an indicator of how well the company is performing on its incremental investment.
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Apple's Return on Investment * |
*Note : Marginal pre-Tax ROC is irrelevant when when incremental invested capital is negative and is hence set to 0% for those scenarios
Capital Invested = Book Value of Equity + Book Value of Debt - Cash & Equivalents ( Marketable securities are not included as Cash )
As is apparent from above numbers, Apple's returns have nose dived in 2013 - It is the first time since 2005 that Apple has reported a decline in operating income resulting in a negative Marginal pre-tax return on capital. It is also the first time since 2005 that Apple's return on invested capital fell under 40%. I am not sure if these are short blips or the beginning of a trend, but it certainly is not a promising sign.
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Marginal Pre-Tax ROC & ROIC (2005-13) |
It is interesting to note that Apple had negative or negligible returns from 2001 through 2003 the period when it launched some of its initial trendsetters ( iTunes, iPod, Mac OS X etc.). So you can argue that a lower or negative return is a not a definitive indicator of future performance. But it is safe to suggest that Apple had suffered a break to its momentum since Tim Cook took the helm and if the status-quo continues, the decline can only become worse. So if you are an Apple Shareholder, you should be worried.
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