Salvatore Ferragamo (BIT:SFER) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at Salvatore Ferragamo (BIT:SFER), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Salvatore Ferragamo:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = €170m ÷ (€1.8b - €439m) (Based on the trailing twelve months to September 2022).

So, Salvatore Ferragamo has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 9.7% it's much better.

View our latest analysis for Salvatore Ferragamo

Above you can see how the current ROCE for Salvatore Ferragamo 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 Salvatore Ferragamo here for free.

How Are Returns Trending?

When we looked at the ROCE trend at Salvatore Ferragamo, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 13% from 25% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Salvatore Ferragamo's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Salvatore Ferragamo. And there could be an opportunity here if other metrics look good too, because the stock has declined 20% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Like most companies, Salvatore Ferragamo does come with some risks, and we've found 1 warning sign that you should be aware of.

While Salvatore Ferragamo may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.