Some Investors May Be Worried About Salvatore Ferragamo's (BIT:SFER) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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 ÷ (€1.7b - €371m) (Based on the trailing twelve months to June 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 9.5% 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 to see what analysts are forecasting going forward, you should check out our free report for Salvatore Ferragamo.

How Are Returns Trending?

When we looked at the ROCE trend at Salvatore Ferragamo, we didn't gain much confidence. To be more specific, ROCE has fallen from 29% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line

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 32% over 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.

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.

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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.