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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? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Hooker Furnishings (NASDAQ:HOFT) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Hooker Furnishings is:

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

0.035 = US$12m ÷ (US$400m - US$60m) (Based on the trailing twelve months to October 2022).

So, Hooker Furnishings has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 16%.

See our latest analysis for Hooker Furnishings

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In the above chart we have measured Hooker Furnishings' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of Hooker Furnishings' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

The Key Takeaway

In summary, it's unfortunate that Hooker Furnishings is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 51% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Hooker Furnishings does have some risks, we noticed 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While Hooker Furnishings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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