Frontdoor (NASDAQ:FTDR) Knows How To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, the ROCE of Frontdoor (NASDAQ:FTDR) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Frontdoor is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.32 = US$259m ÷ (US$1.2b - US$364m) (Based on the trailing twelve months to September 2023).

So, Frontdoor has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 7.6%.

View our latest analysis for Frontdoor

In the above chart we have measured Frontdoor's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Frontdoor's ROCE Trend?

In terms of Frontdoor's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 32% and the business has deployed 37% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Frontdoor can keep this up, we'd be very optimistic about its future.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 31% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Frontdoor's ROCE

Frontdoor has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. However, over the last five years, the stock has only delivered a 36% return to shareholders who held over that period. So to determine if Frontdoor is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

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.