Ferrari (NYSE:RACE) Is Very Good At Capital Allocation

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Ferrari (NYSE:RACE) we really liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ferrari is:

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

0.26 = €1.7b ÷ (€8.6b - €2.2b) (Based on the trailing twelve months to March 2024).

Thus, Ferrari has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Auto industry average of 8.7%.

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 for free.

What The Trend Of ROCE Can Tell Us

Ferrari is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. Basically the business is earning more per dollar of capital invested and in addition to that, 48% more capital is being employed now too. So we're very much inspired by what we're seeing at Ferrari thanks to its ability to profitably reinvest capital.

The Bottom Line On Ferrari's ROCE

To sum it up, Ferrari has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 168% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

While Ferrari looks impressive, no company is worth an infinite price. The intrinsic value infographic for RACE helps visualize whether it is currently trading for a fair price.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.

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