Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics.  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.  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.    

Understanding 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.  Analysts use this formula to calculate it for Ferrari:

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).

So, 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%.  

NYSE:RACE Return on Capital Employed June 26th 2024

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 to see what analysts are forecasting going forward, you should check out our free analyst report for Ferrari .

What Can We Tell From Ferrari's ROCE Trend?

Ferrari is displaying some positive trends.   The data shows that returns on capital have increased substantially over the last  five years to 26%.  The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 48%.   So we're very much inspired by what we're seeing at Ferrari thanks to its ability to profitably reinvest capital.  

In Conclusion...

In summary, it's great to see that Ferrari can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers.       And a remarkable 165% total return over the last  five years tells us that investors are expecting more good things to come in the future.   In light of that, we think it's worth looking further into this stock because if Ferrari can keep these trends up, it could have a bright future ahead.  

On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation for RACE on our platform  that is definitely worth checking out.  

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