Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Frontier Transport Holdings (JSE:FTH), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Frontier Transport Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = R358m ÷ (R2.4b - R423m) (Based on the trailing twelve months to March 2023).
Therefore, Frontier Transport Holdings has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 7.5% it's much better.
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 want to delve into the historical earnings, revenue and cash flow of Frontier Transport Holdings, check out these free graphs here.
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. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Frontier Transport Holdings doesn't end up being a multi-bagger in a few years time.
What We Can Learn From Frontier Transport Holdings' ROCE
In a nutshell, Frontier Transport Holdings has been trudging along with the same returns from the same amount of capital over the last five years. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 163% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 3 warning signs for Frontier Transport Holdings you'll probably want to know about.