Here's What Ferrari's (NYSE:RACE) Strong Returns On Capital Mean
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That's why when we briefly looked at Ferrari's (NYSE:RACE) ROCE trend, we were very happy with what we saw.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ferrari is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = €1.1b ÷ (€6.9b - €1.7b) (Based on the trailing twelve months to December 2021).
Thus, Ferrari has an ROCE of 21%. While that is an outstanding return, the rest of the Auto industry generates similar returns, on average.
Check out our latest analysis for Ferrari
In the above chart we have measured Ferrari's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ferrari.
The Trend Of ROCE
It's hard not to be impressed by Ferrari's returns on capital. The company has employed 103% more capital in the last five years, and the returns on that capital have remained stable at 21%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.
In Conclusion...
In short, we'd argue Ferrari has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And long term investors would be thrilled with the 189% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One more thing, we've spotted 2 warning signs facing Ferrari that you might find interesting.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.
