Today we'll evaluate Interface, Inc. (NASDAQ:TILE) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Interface:
0.11 = US$131m ÷ (US$1.5b - US$234m) (Based on the trailing twelve months to June 2019.)
Therefore, Interface has an ROCE of 11%.
Does Interface Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Interface's ROCE is around the 11% average reported by the Commercial Services industry. Separate from Interface's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Interface's current ROCE of 11% is lower than 3 years ago, when the company reported a 18% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Interface's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Interface.
Do Interface's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Interface has total assets of US$1.5b and current liabilities of US$234m. As a result, its current liabilities are equal to approximately 16% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Interface's ROCE
Overall, Interface has a decent ROCE and could be worthy of further research. Interface looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
Interface is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.