What financial metrics can indicate to us that a company is maturing or even in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Hooker Furnishings (NASDAQ:HOFT), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Hooker Furnishings:

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

0.0031 = US$813k ÷ (US$332m - US$66m) (Based on the trailing twelve months to July 2024).

Thus, Hooker Furnishings has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 14%.

See 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, you can check out the forecasts from the analysts covering Hooker Furnishings for free.

What Does the ROCE Trend For Hooker Furnishings Tell Us?

We are a bit anxious about the trends of ROCE at Hooker Furnishings. To be more specific, today's ROCE was 12% five years ago but has since fallen to 0.3%. In addition to that, Hooker Furnishings is now employing 22% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

What We Can Learn From Hooker Furnishings' ROCE

In summary, it's unfortunate that Hooker Furnishings is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 17% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Hooker Furnishings that you might find interesting.

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.