Yahoo Finance Should You Like Salvatore Ferragamo S.p.A.’s (BIT:SFER) High Return On Capital Employed?
Today we’ll evaluate Salvatore Ferragamo S.p.A. (BIT:SFER) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
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:
0.20 = €188m ÷ (€1.1b – €263m) (Based on the trailing twelve months to September 2018.)
So, Salvatore Ferragamo has an ROCE of 20%.
See our latest analysis for Salvatore Ferragamo
Does Salvatore Ferragamo Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Salvatore Ferragamo’s ROCE is meaningfully higher than the 13% average in the Luxury industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Salvatore Ferragamo compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
As we can see, Salvatore Ferragamo currently has an ROCE of 20%, less than the 39% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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.
Do Salvatore Ferragamo’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Salvatore Ferragamo has total liabilities of €263m and total assets of €1.1b. 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
With that in mind, Salvatore Ferragamo’s ROCE appears pretty good. But note: Salvatore Ferragamo may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Salvatore Ferragamo better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Thank you for reading.
