These Return Metrics Don't Make Frontdoor (NASDAQ:FTDR) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Frontdoor (NASDAQ:FTDR), the trends above didn't look too great.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Frontdoor:

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

0.21 = US$150m ÷ (US$1.1b - US$391m) (Based on the trailing twelve months to September 2022).

Thus, Frontdoor has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Consumer Services industry average of 6.2%.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free report for Frontdoor.

What Does the ROCE Trend For Frontdoor Tell Us?

In terms of Frontdoor's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 33%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Frontdoor to turn into a multi-bagger.

On a related note, Frontdoor has decreased its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Frontdoor's ROCE

In summary, it's unfortunate that Frontdoor is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 50% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Frontdoor does have some risks though, and we've spotted 3 warning signs for Frontdoor that you might be interested in.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.