Interface, Inc.'s (NASDAQ:TILE) 28% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Interface, Inc. (NASDAQ:TILE) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 143% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Interface's price-to-sales (or "P/S") ratio of 1x is worth a mention when the median P/S in the United States' Commercial Services industry is similar at about 1.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Interface

How Interface Has Been Performing

With revenue growth that's inferior to most other companies of late, Interface has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Interface will help you uncover what's on the horizon.

How Is Interface's Revenue Growth Trending?

In order to justify its P/S ratio, Interface would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 2.6% gain to the company's revenues. Revenue has also lifted 15% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 3.7% over the next year. That's shaping up to be materially lower than the 7.0% growth forecast for the broader industry.

With this in mind, we find it intriguing that Interface's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Interface appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

When you consider that Interface's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Interface that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.