Frontier Communications Parent (NASDAQ:FYBR) May Have Issues Allocating Its Capital

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Frontier Communications Parent (NASDAQ:FYBR), so let's see why.

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. To calculate this metric for Frontier Communications Parent, this is the formula:

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

0.041 = US$740m ÷ (US$20b - US$2.0b) (Based on the trailing twelve months to June 2024).

So, Frontier Communications Parent has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Telecom industry average of 9.3%.

Check out our latest analysis for Frontier Communications Parent

In the above chart we have measured Frontier Communications Parent's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Frontier Communications Parent for free.

What Does the ROCE Trend For Frontier Communications Parent Tell Us?

We are a bit worried about the trend of returns on capital at Frontier Communications Parent. Unfortunately the returns on capital have diminished from the 9.9% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Frontier Communications Parent to turn into a multi-bagger.

Our Take On Frontier Communications Parent's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 12% from where it was three years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with Frontier Communications Parent (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

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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.