Capital Investment Trends At Ferrari (NYSE:RACE) Look Strong

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So, when we ran our eye over Ferrari's (NYSE:RACE) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Ferrari:

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

0.22 = €1.4b ÷ (€8.0b - €1.4b) (Based on the trailing twelve months to June 2023).

Thus, Ferrari has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Auto industry average of 10%.

View our latest analysis for Ferrari

In the above chart we have measured Ferrari'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 Ferrari here for free.

What Can We Tell From Ferrari's ROCE Trend?

We'd be pretty happy with returns on capital like Ferrari. The company has consistently earned 22% for the last five years, and the capital employed within the business has risen 91% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If Ferrari can keep this up, we'd be very optimistic about its future.

What We Can Learn From Ferrari's ROCE

In summary, we're delighted to see that Ferrari has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. On top of that, the stock has rewarded shareholders with a remarkable 131% return to those who've held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

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

Ferrari is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.