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Why We Like Hooker Furniture Corporation’s (NASDAQ:HOFT) 17% Return On Capital Employed

Peter Morris

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. Second, we’ll look at its ROCE compared 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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 Hooker Furniture:

0.17 = US$46m ÷ (US$360m – US$66m) (Based on the trailing twelve months to October 2018.)

Therefore, Hooker Furniture has an ROCE of 17%.

See our latest analysis for Hooker Furniture

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Does Hooker Furniture Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Hooker Furniture’s ROCE is meaningfully better than the 11% average in the Consumer Durables industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Hooker Furniture’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

NASDAQGS:HOFT Last Perf January 30th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect Hooker Furniture’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. 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$360m and current liabilities of US$66m. Therefore its current liabilities are equivalent to approximately 18% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Hooker Furniture’s ROCE

Overall, Hooker Furniture has a decent ROCE and could be worthy of further research. But note: Hooker Furniture may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.