Does Hooker Furniture Corporation’s (NASDAQ:HOFT) ROCE Reflect Well On The Business?

Today we’ll evaluate Hooker Furniture Corporation (NASDAQ:HOFT) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

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

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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?

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:

0.13 = US$46m ÷ (US$402m – US$60m) (Based on the trailing twelve months to May 2019.)

So, Hooker Furniture has an ROCE of 13%.

View our latest analysis for Hooker Furniture

Is Hooker Furniture’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Hooker Furniture’s ROCE appears to be around the 13% average of the Consumer Durables industry. 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.

We can see that , Hooker Furniture currently has an ROCE of 13% compared to its ROCE 3 years ago, which was 10%. This makes us think the business might be improving.

NasdaqGS:HOFT Past Revenue and Net Income, August 15th 2019
NasdaqGS:HOFT Past Revenue and Net Income, August 15th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 Hooker Furniture.

How Hooker Furniture’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 liabilities of US$60m and total assets of US$402m. As a result, its current liabilities are equal to approximately 15% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From Hooker Furniture’s ROCE

Overall, Hooker Furniture has a decent ROCE and could be worthy of further research. Hooker Furniture looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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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.