This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on Ford Motor Company (NYSE:F) stock.
Purchasing Ford Motor gives you an ownership stake in the company. Your equity share is granted in return for the capital provided to the business to operate, and in order for an investment to be successful the business has to create earnings from the funds that make up this capital. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Ford Motor’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
What is Return on Capital Employed (ROCE)?
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. We’ll look at Ford Motor’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. F’s ROCE is calculated below:
ROCE Calculation for F
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$6.0b ÷ (US$259.0b – US$94.8b) = 3.7%
As you can see, F earned $3.7 from every $100 you invested over the previous twelve months. This shows Ford Motor provides an unsatisfying capital return that is well below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if F is clever with their reinvestments or dividend payments, investors can still grow their capital although to a poor extent.
What is causing this?
Ford Motor’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Ford Motor is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that F’s ROCE has deteriorated from 4.3%, indicating the company’s capital returns have declined. We can see that earnings have actually increased from US$6.0b to US$6.0b but capital employed has increased by a proportionally greater amount in response to an increase in total assets , which means that although earnings have increased, F requires more capital to produce each $1 of earnings.
Ford Motor’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for F’s future growth? Take a look at our free research report of analyst consensus for F’s outlook.
- Valuation: What is F worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether F is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 firstname.lastname@example.org.