How Do Willdan Group, Inc.’s (NASDAQ:WLDN) Returns Compare To Its Industry?

Today we’ll evaluate Willdan Group, Inc. (NASDAQ:WLDN) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

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 Willdan Group:

0.03 = US$7.7m ÷ (US$363m – US$101m) (Based on the trailing twelve months to September 2019.)

So, Willdan Group has an ROCE of 3.0%.

See our latest analysis for Willdan Group

Does Willdan Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Willdan Group’s ROCE appears to be significantly below the 12% average in the Professional Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Willdan Group compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. There are potentially more appealing investments elsewhere.

Willdan Group’s current ROCE of 3.0% is lower than 3 years ago, when the company reported a 18% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Willdan Group’s ROCE compares to its industry.

NasdaqGM:WLDN Past Revenue and Net Income, November 29th 2019
NasdaqGM:WLDN Past Revenue and Net Income, November 29th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Willdan Group’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Willdan Group has total liabilities of US$101m and total assets of US$363m. As a result, its current liabilities are equal to approximately 28% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

Our Take On Willdan Group’s ROCE

While that is good to see, Willdan Group has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Willdan Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.