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What You Must Know About Hooker Furniture Corporation’s (HOFT) ROE

Brandy Kinsey

Hooker Furniture Corporation (NASDAQ:HOFT) delivered an ROE of 15.33% over the past 12 months, which is an impressive feat relative to its industry average of 10.92% during the same period. On the surface, this looks fantastic since we know that HOFT has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether HOFT’s ROE is actually sustainable. View our latest analysis for Hooker Furniture

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) is a measure of HOFT’s profit relative to its shareholders’ equity. For example, if HOFT invests $1 in the form of equity, it will generate $0.15 in earnings from this. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for HOFT, which is 10.53%. Since HOFT’s return covers its cost in excess of 4.80%, its use of equity capital is efficient and likely to be sustainable. Simply put, HOFT pays less for its capital than what it generates in return. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NasdaqGS:HOFT Last Perf Oct 7th 17

Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue HOFT can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable HOFT’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt HOFT currently has. Currently the debt-to-equity ratio stands at a low 21.45%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.

NasdaqGS:HOFT Historical Debt Oct 7th 17

What this means for you:

Are you a shareholder? HOFT’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Since ROE is not inflated by excessive debt, it might be a good time to add more of HOFT to your portfolio if your personal research is confirming what the ROE is telling you. If you're looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.

Are you a potential investor? If you are considering investing in HOFT, basing your decision on ROE alone is certainly not sufficient. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Hooker Furniture to help you make a more informed investment decision.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.