Salvatore Ferragamo (BIT:SFER) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Salvatore Ferragamo (BIT:SFER) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Salvatore Ferragamo is:

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

0.10 = €128m ÷ (€1.6b - €321m) (Based on the trailing twelve months to December 2022).

Thus, Salvatore Ferragamo has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 9.7%.

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.

What Can We Tell From Salvatore Ferragamo's ROCE Trend?

When we looked at the ROCE trend at Salvatore Ferragamo, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 10%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

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. These growth trends haven't led to growth returns though, since the stock has fallen 22% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know about the risks facing Salvatore Ferragamo, we've discovered 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.