Returns On Capital Signal Tricky Times Ahead For Interface (NASDAQ:TILE)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Interface (NASDAQ:TILE), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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 Interface:

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

0.12 = US$131m ÷ (US$1.3b - US$249m) (Based on the trailing twelve months to July 2022).

Therefore, Interface has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Commercial Services industry average of 9.7% it's much better.

Our analysis indicates that TILE is potentially undervalued!

In the above chart we have measured Interface's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Interface.

What The Trend Of ROCE Can Tell Us

In terms of Interface's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line On Interface's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Interface. These growth trends haven't led to growth returns though, since the stock has fallen 47% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Like most companies, Interface does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.