This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Interface Inc (NASDAQ:TILE)’s fundamentals and stock market performance.
Interface Inc (NASDAQ:TILE) trades with a trailing P/E of 24.5x, which is higher than the industry average of 18.3x. While TILE might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Interface
What you need to know about the P/E ratio
A common ratio used for relative valuation is the P/E ratio. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for TILE
Price-Earnings Ratio = Price per share ÷ Earnings per share
TILE Price-Earnings Ratio = $24.1 ÷ $0.982 = 24.5x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to TILE, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. TILE’s P/E of 24.5x is higher than its industry peers (18.3x), which implies that each dollar of TILE’s earnings is being overvalued by investors. Therefore, according to this analysis, TILE is an over-priced stock.
A few caveats
However, before you rush out to sell your TILE shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to TILE, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with TILE, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing TILE to are fairly valued by the market. If this is violated, TILE’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to TILE. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for TILE’s future growth? Take a look at our free research report of analyst consensus for TILE’s outlook.
- Past Track Record: Has TILE been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of TILE’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.