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

Today we are going to look at Bassett Furniture Industries, Incorporated (NASDAQ:BSET) to see whether it might be an attractive investment prospect. 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. Then we’ll determine how its current liabilities are affecting 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. 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?

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 Bassett Furniture Industries:

0.067 = US$14m ÷ (US$292m – US$82m) (Based on the trailing twelve months to November 2018.)

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

View our latest analysis for Bassett Furniture Industries

Is Bassett Furniture Industries’s ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Bassett Furniture Industries’s ROCE is meaningfully below the Consumer Durables industry average of 11%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Bassett Furniture Industries’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. 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 13% ROCE. This makes us wonder if the business is facing new challenges.

NasdaqGS:BSET Past Revenue and Net Income, March 11th 2019
NasdaqGS:BSET Past Revenue and Net Income, March 11th 2019

It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our 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$292m and current liabilities of US$82m. As a result, its current liabilities are equal to approximately 28% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From Bassett Furniture Industries’s ROCE

With that in mind, we’re not overly impressed with Bassett Furniture Industries’s ROCE, so it may not be the most appealing prospect. You might be able to find a better buy than Bassett Furniture Industries. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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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.