Ferrari (NYSE:RACE) a Lesson in Practicality

Ferrari (NYSE:RACE) a Lesson in Practicality

$RACE

This is a lesson grounded in practicality using ROE to better understand Ferrari (NYSE:RACE).

Ferrari has a ROE of 61%, based on the last 12 months, meaning that for every $1 worth of shareholders’ equity, it generated 61c in profit.

Return on Equity = Net Profit ÷ Shareholders’ Equity

For Ferrari: 61% = €837-M ÷ €1.4-B (Based on the trailing 12 months to June 2019.)

NOTE: It is easy to understand the ‘net profit‘ part of the equation, but ‘shareholders’ equity’ requires further explanation. It is all the money paid into the company from shareholders, plus any earnings retained. You can calculate shareholders’ equity by subtracting the company’s total liabilities from its total assets.

ROE measures a company’s profitability against the profit it retains, and any outside investments. The ‘return’ is the yearly profit. A higher profit will lead to a higher ROE. So, a high ROE is a good thing.

A Key way to determine if a company has a good ROE is to compare it to the average for its industry sector. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As you can see in the graphic below, Ferrari has a higher ROE than the average (18%) in the Auto industry.

NYSE:RACE Past Revenue and Net Income, October 31st 2019
NYSE:RACE Past Revenue and Net Income, October 31st 2019

That is a good sign, as a high ROE almost always warrants a closer look, check is if insiders have bought shares recently.

It is worth noting the significant use of debt by Ferrari, leading to its debt to equity ratio of 1.43.

ROE is useful for comparing the quality of different businesses. A company that can achieve a high ROE without debt could be considered a high quality business, Ferrari is retiring its debt. All else being equal, a higher ROE is better.

Have a look at this Ferrari data

Catch all the action from the United States Grand Prix on ESPN and ABC.

Ferrari is the Aristocrat of the automotive sector.

Enzo Ferrari’s iconic Italian Supercar manufacturer claimed the title according to the latest Brand Finance Global 500 2019 report launched at the World Economic Forum in Davos.

HeffX-LTN overall technical outlook for RACE is Neutral to Bearish, overhead resistance is at N/A, and support at 155.30 as 3 of our 3 Key indicators have turned Very Bullish and the stock has established long term support.

Ferrari finished at 161.28, +1.26 Friday in NY.

Note: Goldman Sachs upgraded Ferrari to ‘buy‘ from ‘neutral ‘calling the stock’s pullback a good “entry point.” “We upgrade Ferrari from Neutral to Buy, offering 15% upside to our new price targets of 182. Our thesis, outlined in Life of Luxury published in September, is fundamentally unchanged post Ferrari’s in-line 2-Q results. We view the stock’s recent pullback since July 16 has provided good entry point in here.

Ferrari will continue to create value in the long term. Ferrari is a quality 1st long term investment, and I see it at 200/share in that frame

Tune and enjoy the F1 racing at Austin Tx this weekend.

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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