Today we'll evaluate Haverty Furniture Companies, Inc. (NYSE:HVT) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. 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 Haverty Furniture Companies:
0.073 = US$32m ÷ (US$579m - US$133m) (Based on the trailing twelve months to September 2019.)
So, Haverty Furniture Companies has an ROCE of 7.3%.
Is Haverty Furniture Companies's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Haverty Furniture Companies's ROCE is meaningfully below the Specialty Retail industry average of 11%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Haverty Furniture Companies stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
We can see that, Haverty Furniture Companies currently has an ROCE of 7.3%, less than the 11% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Haverty Furniture Companies's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 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.
Haverty Furniture Companies's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Haverty Furniture Companies has total liabilities of US$133m and total assets of US$579m. As a result, its current liabilities are equal to approximately 23% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
What We Can Learn From Haverty Furniture Companies's ROCE
If Haverty Furniture Companies 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 Haverty Furniture Companies. 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 email@example.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.
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