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? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Hooker Furnishings (NASDAQ:HOFT), so let's see why.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Hooker Furnishings:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.042 = US$13m ÷ (US$354m - US$47m) (Based on the trailing twelve months to October 2023).

So, Hooker Furnishings has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 14%.

View our latest analysis for Hooker Furnishings

Above you can see how the current ROCE for Hooker Furnishings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Hooker Furnishings .

So How Is Hooker Furnishings' ROCE Trending?

There is reason to be cautious about Hooker Furnishings, given the returns are trending downwards. About five years ago, returns on capital were 16%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Hooker Furnishings to turn into a multi-bagger.

What We Can Learn From Hooker Furnishings' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 13% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Hooker Furnishings does have some risks though, and we've spotted 1 warning sign for Hooker Furnishings that you might be interested in.

While Hooker Furnishings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.