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Why Forrester Research, Inc.’s (NASDAQ:FORR) Return On Capital Employed Looks Uninspiring

Simply Wall St

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Today we'll look at Forrester Research, Inc. (NASDAQ:FORR) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

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 Forrester Research:

0.056 = US$21m ÷ (US$640m - US$270m) (Based on the trailing twelve months to March 2019.)

Therefore, Forrester Research has an ROCE of 5.6%.

View our latest analysis for Forrester Research

Does Forrester Research Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Forrester Research's ROCE is meaningfully below the Professional Services industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Forrester Research compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.

Forrester Research's current ROCE of 5.6% is lower than 3 years ago, when the company reported a 17% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Forrester Research's past growth compares to other companies.

NasdaqGS:FORR Past Revenue and Net Income, July 3rd 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Forrester Research's Current Liabilities Skew 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.

Forrester Research has total liabilities of US$270m and total assets of US$640m. As a result, its current liabilities are equal to approximately 42% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Forrester Research's ROCE is concerning.

The Bottom Line On Forrester Research's ROCE

So researching other companies may be a better use of your time. Of course, you might also be able to find a better stock than Forrester Research. So you may wish to see this free collection of other companies that have grown earnings strongly.

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

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.

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. Thank you for reading.