Are Hooker Furniture Corporation’s (NASDAQ:HOFT) Returns On Investment Worth Your While?

Today we are going to look at Hooker Furniture Corporation (NASDAQ:HOFT) to see whether it might be an attractive investment prospect. 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. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?

Analysts use this formula to calculate return on capital employed:

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

Or for Hooker Furniture:

0.096 = US$33m ÷ (US$402m – US$62m) (Based on the trailing twelve months to November 2019.)

So, Hooker Furniture has an ROCE of 9.6%.

Check out our latest analysis for Hooker Furniture

Is Hooker Furniture’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Hooker Furniture’s ROCE appears to be around the 11% average of the Consumer Durables industry. Setting aside the industry comparison for now, Hooker Furniture’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

You can click on the image below to see (in greater detail) how Hooker Furniture’s past growth compares to other companies.

NasdaqGS:HOFT Past Revenue and Net Income, December 14th 2019
NasdaqGS:HOFT Past Revenue and Net Income, December 14th 2019

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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hooker Furniture.

Hooker Furniture’s Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Hooker Furniture has total assets of US$402m and current liabilities of US$62m. Therefore its current liabilities are equivalent to approximately 15% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Hooker Furniture’s ROCE

With that in mind, we’re not overly impressed with Hooker Furniture’s ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Hooker Furniture. So you may wish to see this free collection of other companies that have grown earnings strongly.

Hooker Furniture is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.