Slowing Yields at Floor & Decor Holdings (NYSE:FND) Leave Little Room for Enthusiasm

To find a multi-bagger stock, what are the underlying trends we should look for in a company? In a perfect world, we would like to see a company investing more capital into its business and ideally, the returns on that capital are increasing as well. This shows us that it is a capitalization machine, capable of continually reinvesting its profits into the business and generating higher returns. That said, on the surface, Floor and decoration funds (NYSE:FND) we’re not jumping out of our chairs at the change in yields, but let’s take a closer look.

What is Return on Capital Employed (ROCE)?

To clarify if you are unsure, ROCE is a metric that measures the pre-tax income (as a percentage) that a company earns on the capital invested in its business. To calculate this metric for Floor & Decor Holdings, here is the formula:

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

0.08 = $288 million ÷ ($4.7 billion – $1.1 billion) (Based on the last twelve months to March 2024).

SO, Floor & Decor Holdings has a ROCE of 8.0%. Ultimately, this is a low return and is below the specialty retail industry average of 12%.

Check out our latest analysis for Floor & Decor Holdings

In the chart above we’ve compared Floor & Decor Holdings’s historical ROCE to its past performance, but the future is arguably more important. If you’d like to see what the analysts are predicting for the future, you should check out our free analyst report for Floor & Decor Holdings.

What can we learn from Floor & Decor Holdings’ ROCE trend?

Return on capital hasn’t changed much for Floor & Decor Holdings in recent years. The company has consistently made a profit of 8.0% over the last five years and the capital employed within the business has increased by 143% over that time. Given that the company has increased the amount of capital employed, it seems that the investments that have been made simply aren’t providing a high return on capital.

The essential

Long story short, while Floor & Decor Holdings has been reinvesting its capital, the returns it generates have not increased. Yet for long-term shareholders, the stock has returned an incredible 113% over the last five years, suggesting the market is optimistic about its future. However, unless these underlying trends become more positive, we shouldn’t get our hopes up too much.

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

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

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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 constitute financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. Our goal is to provide you with focused, long-term analysis based on fundamental data. Please note that our analysis may not factor in the latest price-sensitive company announcements or qualitative information. Simply Wall St has no position in any of the stocks mentioned.

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