Salvatore Ferragamo (BIT:SFER) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Salvatore Ferragamo (BIT:SFER) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Salvatore Ferragamo, this is the formula:

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

0.06 = €84m ÷ (€1.8b - €388m) (Based on the trailing twelve months to June 2023).

Therefore, Salvatore Ferragamo has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.

View our latest analysis for Salvatore Ferragamo

In the above chart we have measured Salvatore Ferragamo's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Salvatore Ferragamo here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Salvatore Ferragamo doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like Salvatore Ferragamo might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Salvatore Ferragamo's ROCE

In summary, Salvatore Ferragamo is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 34% in the last five years. Therefore based on the analysis done in this article, we don't think Salvatore Ferragamo has the makings of a multi-bagger.

Salvatore Ferragamo does have some risks though, and we've spotted 2 warning signs for Salvatore Ferragamo that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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

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.