Yahoo Finance Here’s What Salvatore Ferragamo S.p.A.’s (BIT:SFER) Return On Capital Can Tell Us
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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. All else being equal, a better business will have a higher ROCE. 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.'
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Salvatore Ferragamo:
0.12 = €160m ÷ (€1.8b - €420m) (Based on the trailing twelve months to June 2019.)
Therefore, Salvatore Ferragamo has an ROCE of 12%.
Check out our latest analysis for Salvatore Ferragamo
Is Salvatore Ferragamo's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Salvatore Ferragamo's ROCE appears to be around the 12% average of 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 12% is lower than 3 years ago, when the company reported a 36% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Salvatore Ferragamo's past growth compares to other companies.
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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
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 total liabilities of €420m and total assets of €1.8b. 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.
What We Can Learn From Salvatore Ferragamo's ROCE
This is good to see, and with a sound ROCE, Salvatore Ferragamo could be worth a closer look. Salvatore Ferragamo looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.
