Yahoo Finance Why You Should Like frontdoor, inc.’s (NASDAQ:FTDR) ROCE
Today we'll evaluate frontdoor, inc. (NASDAQ:FTDR) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for frontdoor:
0.30 = US$262m ÷ (US$1.3b - US$364m) (Based on the trailing twelve months to December 2019.)
Therefore, frontdoor has an ROCE of 30%.
View our latest analysis for frontdoor
Does frontdoor Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that frontdoor's ROCE is meaningfully better than the 8.3% average in the Consumer Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, frontdoor's ROCE currently appears to be excellent.
The image below shows how frontdoor's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for frontdoor.
What Are Current Liabilities, And How Do They Affect frontdoor's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
frontdoor has current liabilities of US$364m and total assets of US$1.3b. Therefore its current liabilities are equivalent to approximately 29% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
Our Take On frontdoor's ROCE
Low current liabilities and high ROCE is a good combination, making frontdoor look quite interesting. frontdoor shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
