Investors encountered a slowdown in capital returns at Frontdoor (NASDAQ: FTDR)
Did you know that there are financial metrics that can provide clues of a potential multi-bagger? Typically, we will want to notice a growth trend come back on capital employed (ROCE) and at the same time, a base capital employed. Ultimately, this demonstrates that this is a company that reinvests its earnings at increasing rates of return. To look at Front door (NASDAQ:FTDR) it has a high ROCE right now, but let’s see how the returns move.
What is return on capital employed (ROCE)?
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. The formula for this calculation on Frontdoor is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.29 = $194 million ÷ ($1.1 billion – $404 million) (Based on the last twelve months to June 2022).
Thereby, Frontdoor has a ROCE of 29%. This is a fantastic return and not only that, it exceeds the 7.5% average earned by companies in a similar industry.
In the chart above, we measured Frontdoor’s past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Frontdoor.
What is the return trend?
There’s not much to report on Frontdoor’s returns and its level of capital employed, as both metrics have remained stable over the past five years. This tells us that the company is not reinvesting in itself, so it is plausible that it is past the growth phase. Although current yields are high, we would need more evidence of underlying growth to make it look like a multi-bagger going forward.
Additionally, Frontdoor has done well to reduce current liabilities to 38% of total assets over the past five years. This can eliminate some of the risks inherent in operations, as the business has fewer outstanding obligations to suppliers and/or short-term creditors than before.
Our view on Frontdoor’s ROCE
In summary, Frontdoor does not increase its profits, but generates decent returns on the same amount of capital used. And over the past three years, the stock has fallen 57%, so the market doesn’t seem too optimistic that these trends will strengthen any time soon. Either way, the stock lacks those features of a multi-bagger discussed above, so if that’s what you’re looking for, we think you’d have better luck elsewhere.
One more thing to note, we have identified 1 warning sign with entrance door and understanding it should be part of your investment process.
Frontdoor isn’t the only stock to generate high returns. If you want to see more, check out our free list of companies that deliver high returns on equity with strong fundamentals.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.