Bassett Furniture Industries, Incorporated’s (NASDAQ:BSET) Investment Returns Are Lagging Its Industry

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Today we are going to look at Bassett Furniture Industries, Incorporated (NASDAQ:BSET) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

So, How Do We Calculate ROCE?

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 Bassett Furniture Industries:

0.067 = US$14m ÷ (US$282m – US$73m) (Based on the trailing twelve months to March 2019.)

Therefore, Bassett Furniture Industries has an ROCE of 6.7%.

Check out our latest analysis for Bassett Furniture Industries

Does Bassett Furniture Industries Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see Bassett Furniture Industries’s ROCE is meaningfully below the Consumer Durables industry average of 11%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Bassett Furniture Industries stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

Bassett Furniture Industries’s current ROCE of 6.7% is lower than 3 years ago, when the company reported a 14% ROCE. Therefore we wonder if the company is facing new headwinds.

NasdaqGS:BSET Past Revenue and Net Income, June 20th 2019
NasdaqGS:BSET Past Revenue and Net Income, June 20th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Bassett Furniture Industries.

How Bassett Furniture Industries’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Bassett Furniture Industries has total assets of US$282m and current liabilities of US$73m. As a result, its current liabilities are equal to approximately 26% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

Our Take On Bassett Furniture Industries’s ROCE

If Bassett Furniture Industries continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Bassett Furniture Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.