Investors Could Be Concerned With Hooker Furnishings' (NASDAQ:HOFT) Returns On Capital
If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Hooker Furnishings (NASDAQ:HOFT), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hooker Furnishings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.056 = US$18m ÷ (US$382m - US$50m) (Based on the trailing twelve months to January 2023).
Thus, Hooker Furnishings has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 17%.
View our latest analysis for Hooker Furnishings
In the above chart we have measured Hooker Furnishings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Hooker Furnishings. About five years ago, returns on capital were 16%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hooker Furnishings becoming one if things continue as they have.
The Bottom Line On Hooker Furnishings' ROCE
In summary, it's unfortunate that Hooker Furnishings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 61% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Hooker Furnishings does have some risks though, and we've spotted 1 warning sign for Hooker Furnishings that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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