Slowing yields at Floor & Decor Holdings (NYSE: FND) leaves little room for excitement

If we are to find multi-bagger potential, there are often underlying trends that can provide clues. Ideally, a business will display two trends; first growth to return to on capital employed (ROCE) and on the other hand, an increase quantity capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. With this in mind, the ROCE of Floor and decoration funds (NYSE: FND) looks decent, right now, so let’s see what the yield trend can tell us.

Understanding Return on Capital Employed (ROCE)

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. The formula for this calculation on Floor & Decor Holdings is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.13 = $ 350 million ($ 3.6 billion – $ 1.0 billion) (Based on the last twelve months up to September 2021).

So, Floor & Decor Holdings has a ROCE of 13%. In absolute terms, that’s a pretty standard return, but compared to the specialty retail industry average, it lags behind.

Check out our latest review for Floor & Decor Holdings

NYSE: FND Return on Capital Employed December 11, 2021

Above you can see how Floor & Decor Holdings’ current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Floor & Decor Holdings.

What does the ROCE trend tell us for Floor & Decor Holdings?

While the returns on capital are good, they haven’t budged much. The company has employed 357% more capital over the past five years and returns on that capital have remained stable at 13%. Since 13% is moderate ROCE, it’s good to see that a company can keep reinvesting at these decent rates of return. Over long periods of time, returns like these may not be very exciting, but with consistency, they can be profitable in terms of stock price performance.

The bottom line

In the end, Floor & Decor Holdings has proven its ability to adequately reinvest capital at good rates of return. And the stock has performed incredibly well with a return of 371% over the past three years, so long-term investors are no doubt delighted with the result. So while the positive underlying trends can be explained by investors, we still believe this stock is worth looking into.

One more thing to note, we have identified 1 warning sign with Floor & Decor Holdings and understand that this should be part of your investment process.

Although Floor & Decor Holdings doesn’t generate the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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