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Hooker Furniture Corporation (NASDAQ:HOFT) Earns A Nice Return On Capital Employed

Simply Wall St

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Today we are going to look at Hooker Furniture Corporation (NASDAQ:HOFT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

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. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Hooker Furniture:

0.13 = US$46m ÷ (US$402m - US$60m) (Based on the trailing twelve months to May 2019.)

Therefore, Hooker Furniture has an ROCE of 13%.

Check out our latest analysis for Hooker Furniture

Is Hooker Furniture's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Hooker Furniture's ROCE is meaningfully higher than the 11% average in the Consumer Durables industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Hooker Furniture compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, Hooker Furniture's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 10%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Hooker Furniture's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:HOFT Past Revenue and Net Income, July 19th 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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hooker Furniture.

Hooker Furniture's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Hooker Furniture has total assets of US$402m and current liabilities of US$60m. As a result, its current liabilities are equal to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Hooker Furniture's ROCE

With that in mind, Hooker Furniture's ROCE appears pretty good. Hooker Furniture looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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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.