Stock Analysis

Does Hooker Furniture (NASDAQ:HOFT) Have A Healthy Balance Sheet?

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NasdaqGS:HOFT
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Hooker Furniture Corporation (NASDAQ:HOFT) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hooker Furniture

What Is Hooker Furniture's Debt?

As you can see below, Hooker Furniture had US$25.7m of debt at November 2020, down from US$31.1m a year prior. However, it does have US$93.9m in cash offsetting this, leading to net cash of US$68.1m.

debt-equity-history-analysis
NasdaqGS:HOFT Debt to Equity History January 3rd 2021

How Healthy Is Hooker Furniture's Balance Sheet?

We can see from the most recent balance sheet that Hooker Furniture had liabilities of US$74.8m falling due within a year, and liabilities of US$43.3m due beyond that. Offsetting these obligations, it had cash of US$93.9m as well as receivables valued at US$75.3m due within 12 months. So it actually has US$51.1m more liquid assets than total liabilities.

This surplus suggests that Hooker Furniture has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Hooker Furniture boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Hooker Furniture has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hooker Furniture can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hooker Furniture may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hooker Furniture generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hooker Furniture has net cash of US$68.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$81m. So we don't think Hooker Furniture's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Hooker Furniture you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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