If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Frontier Transport Holdings (JSE:FTH), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
What Is 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. 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)
0.24 = R494m ÷ (R2.5b - R492m) (Based on the trailing twelve months to September 2024).
So, Frontier Transport Holdings has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Transportation industry average of 15%.
View our latest analysis for Frontier Transport Holdings
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Frontier Transport Holdings' past further, check out this free graph covering Frontier Transport Holdings' past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
There hasn't been much to report for Frontier Transport Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. Although current returns are high, we'd need more evidence of underlying growth for it to look like a multi-bagger going forward.
The Bottom Line On Frontier Transport Holdings' ROCE
In summary, Frontier Transport Holdings isn't compounding its earnings but is generating decent returns on the same amount of capital employed. Yet to long term shareholders the stock has gifted them an incredible 299% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
One more thing, we've spotted 2 warning signs facing Frontier Transport Holdings that you might find interesting.