Investors Met With Slowing Returns on Capital At Frontdoor (NASDAQ:FTDR)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So while Frontdoor (NASDAQ:FTDR) has a high ROCE right now, lets see what we can decipher from how returns are changing.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Frontdoor:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$267m ÷ (US$1.1b - US$331m) (Based on the trailing twelve months to December 2023).
So, Frontdoor has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 9.3% earned by companies in a similar industry.
Check out our latest analysis for Frontdoor
Above you can see how the current ROCE for Frontdoor compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Frontdoor .
What The Trend Of ROCE Can Tell Us
Over the past five years, Frontdoor's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So while the current operations are delivering respectable returns, unless capital employed increases we'd be hard-pressed to believe it's a multi-bagger going forward.
The Bottom Line On Frontdoor's ROCE
While Frontdoor has impressive profitability from its capital, it isn't increasing that amount of capital. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Frontdoor has the makings of a multi-bagger.
If you want to continue researching Frontdoor, you might be interested to know about the 1 warning sign that our analysis has discovered.
Frontdoor is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.
