U.S. Markets closed
  • S&P 500

    3,669.01
    +6.56 (+0.18%)
     
  • Dow 30

    29,883.79
    +59.87 (+0.20%)
     
  • Nasdaq

    12,349.37
    -5.74 (-0.05%)
     
  • Russell 2000

    1,838.03
    +1.98 (+0.11%)
     
  • Crude Oil

    44.88
    -0.40 (-0.88%)
     
  • Gold

    1,834.00
    +3.80 (+0.21%)
     
  • Silver

    24.17
    +0.09 (+0.39%)
     
  • EUR/USD

    1.2118
    +0.0040 (+0.3272%)
     
  • 10-Yr Bond

    0.9480
    +0.0140 (+1.50%)
     
  • Vix

    21.17
    +0.40 (+1.93%)
     
  • GBP/USD

    1.3370
    -0.0053 (-0.3971%)
     
  • USD/JPY

    104.4470
    +0.1310 (+0.1256%)
     
  • BTC-USD

    19,212.52
    +218.62 (+1.15%)
     
  • CMC Crypto 200

    376.17
    +11.25 (+3.08%)
     
  • FTSE 100

    6,463.39
    +78.66 (+1.23%)
     
  • Nikkei 225

    26,800.98
    +13.44 (+0.05%)
     

The Returns At Ferrari (NYSE:RACE) Provide Us With Signs Of What's To Come

Simply Wall St
·3 min read

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Ferrari's (NYSE:RACE) ROCE trend, we were pretty happy with what we saw.

Understanding 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)

0.14 = €701m ÷ (€5.9b - €916m) (Based on the trailing twelve months to June 2020).

So, Ferrari has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Auto industry.

Check out our latest analysis for Ferrari

roce
roce

Above you can see how the current ROCE for Ferrari compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ferrari here for free.

So How Is Ferrari's ROCE Trending?

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 14% and the business has deployed 45% more capital into its operations. Since 14% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 16% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

What We Can Learn From Ferrari's ROCE

In the end, Ferrari has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 293% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One more thing, we've spotted 2 warning signs facing Ferrari that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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. 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.

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