Today we'll look at Salvatore Ferragamo S.p.A. (BIT:SFER) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Salvatore Ferragamo:
0.11 = €150m ÷ (€1.7b - €403m) (Based on the trailing twelve months to December 2019.)
Therefore, Salvatore Ferragamo has an ROCE of 11%.
Does Salvatore Ferragamo Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Salvatore Ferragamo's ROCE is around the 11% average reported by the Luxury industry. Regardless of where Salvatore Ferragamo sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Salvatore Ferragamo's current ROCE of 11% is lower than its ROCE in the past, which was 32%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Salvatore Ferragamo's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Salvatore Ferragamo.
What Are Current Liabilities, And How Do They Affect Salvatore Ferragamo's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Salvatore Ferragamo has current liabilities of €403m and total assets of €1.7b. As a result, its current liabilities are equal to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Salvatore Ferragamo's ROCE
Overall, Salvatore Ferragamo has a decent ROCE and could be worthy of further research. There might be better investments than Salvatore Ferragamo out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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