HNI (NYSE:HNI) capital returns do not reflect activity well
What financial indicators can tell us that a company is maturing or even declining? More often than not we will see a decline come back on capital employed (ROCE) and a decrease amount capital employed. This indicates that the company is getting less profit from its investments and its total assets are decreasing. In light of this, at a first glance at HNI (NYSE:HNI), we’ve spotted signs that he might be in trouble, so let’s investigate.
Return on capital employed (ROCE): what is it?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for HNI:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.089 = $97 million ÷ ($1.6 billion – $492 million) (Based on the last twelve months to July 2022).
Thereby, HNI has a ROCE of 8.9%. That’s a low number on its own, but it’s around the 8.3% average generated by the business services industry.
See our latest analysis for HNI
In the chart above, we measured HNI’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts are predicting for the future, you should check out our free report for HNI.
So, what is the ROCE trend of HNI?
In terms of historical movements of HNI’s ROCE, the trend does not inspire confidence. Unfortunately, capital returns have declined from the 17% they were earning five years ago. In addition to this, it should be noted that the amount of capital used within the company remained relatively stable. This combination may be a sign of a mature business that still has areas to deploy capital, but the returns received are not as high due potentially to new competition or lower margins. So, because these trends are generally not conducive to the creation of a multi-bagger, we won’t hold our breath on HNI becoming one if things continue as they have.
In summary, it is unfortunate that HNI generates lower returns from the same amount of capital. Investors should expect better things on the horizon, however, as the stock is up 8.7% over the past five years. Either way, we’re not big fans of current trends, so we think you might find better investments elsewhere.
Like most businesses, HNI comes with some risk, and we have found 2 warning signs of which you should be aware.
Although HNI does not generate the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.