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Today we are going to look at Forward Industries, Inc. (NASDAQ:FORD) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Forward Industries:
0.048 = US$557k ÷ (US$19m – US$7.6m) (Based on the trailing twelve months to September 2018.)
So, Forward Industries has an ROCE of 4.8%.
Is Forward Industries’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Forward Industries’s ROCE is meaningfully below the Luxury industry average of 14%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Forward Industries’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Forward Industries delivered an ROCE of 4.8%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.
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, after all, simply a snap shot of a single year. How cyclical is Forward Industries? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Forward Industries’s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Forward Industries has total assets of US$19m and current liabilities of US$7.6m. As a result, its current liabilities are equal to approximately 40% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Forward Industries’s low ROCE is unappealing.
Our Take On Forward Industries’s ROCE
There are likely better investments out there. Of course you might be able to find a better stock than Forward Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Forward Industries better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.