Here's What's Concerning About Frontier Group Holdings' (NASDAQ:ULCC) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Frontier Group Holdings (NASDAQ:ULCC), we don't think it's current trends fit the mold of a multi-bagger.

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

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 Group Holdings, this is the formula:

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

0.0026 = US$8.0m ÷ (US$4.7b - US$1.6b) (Based on the trailing twelve months to June 2023).

So, Frontier Group Holdings has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 9.7%.

See our latest analysis for Frontier Group Holdings

Above you can see how the current ROCE for Frontier Group Holdings compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Frontier Group Holdings here for free.

What Can We Tell From Frontier Group Holdings' ROCE Trend?

When we looked at the ROCE trend at Frontier Group Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 0.3%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Frontier Group Holdings has decreased its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Frontier Group Holdings' ROCE

While returns have fallen for Frontier Group Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 45% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Frontier Group Holdings, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.