HNI Corporation (NYSE:HNI) Earns Among The Best Returns In Its Industry

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Today we’ll look at HNI Corporation (NYSE:HNI) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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’.

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 HNI:

0.14 = US$144m ÷ (US$1.4b – US$373m) (Based on the trailing twelve months to March 2019.)

Therefore, HNI has an ROCE of 14%.

View our latest analysis for HNI

Does HNI Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. HNI’s ROCE appears to be substantially greater than the 11% average in the Commercial Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where HNI sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

HNI’s current ROCE of 14% is lower than 3 years ago, when the company reported a 22% ROCE. So investors might consider if it has had issues recently.

NYSE:HNI Past Revenue and Net Income, June 24th 2019
NYSE:HNI Past Revenue and Net Income, June 24th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for HNI.

How HNI’s Current Liabilities Impact 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. 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.

HNI has total assets of US$1.4b and current liabilities of US$373m. As a result, its current liabilities are equal to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On HNI’s ROCE

Overall, HNI has a decent ROCE and could be worthy of further research. There might be better investments than HNI out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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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.