Slowing Rates Of Return At Frontier Transport Holdings (JSE:FTH) Leave Little Room For Excitement

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Frontier Transport Holdings (JSE:FTH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Frontier Transport Holdings:

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

0.19 = R348m ÷ (R2.3b - R464m) (Based on the trailing twelve months to September 2021).

So, Frontier Transport Holdings has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 7.1% it's much better.

See our latest analysis for Frontier Transport Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Frontier Transport Holdings' ROCE against it's prior returns. If you're interested in investigating Frontier Transport Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Frontier Transport Holdings' ROCE Trending?

Over the past four years, Frontier Transport Holdings' ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at Frontier Transport Holdings in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

The Bottom Line

We can conclude that in regards to Frontier Transport Holdings' returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 82% over the last three years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 3 warning signs with Frontier Transport Holdings (at least 1 which can't be ignored) , and understanding them would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.