Ferrari (NYSE:RACE) Outperforms the Entire Automotive Sector
Ferrari (NYSE:RACE) delivered an ROE of 63.1% over the past 12 months, impressive in the extreme compared to the industry average of 14.0% during the same frame. RACE has made huge profits from little equity capital.
Taking a closer look at some factors like financial leverage to see how sustainable Ferrari’s ROE is.
ROE (Return on Equity) is a measure of profit relative to its shareholders’ equity. For example, if Ferrari invests $1 in the form of equity, it will generate 0.63 in earnings from this.
Return on Equity = Net Profit ÷ Shareholders Equity
In most cases, a higher ROE is preferred. But, there areother factors we must consider when making any investment decisions.
ROE is measured against cost of equity in order to determine the efficiency of Ferrari’s equity capital deployed. Its cost of equity is 8.6%.
This means Ferrari returns enough to cover its own cost of equity, with a buffer of 54.6%.
This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be dissected into 3 distinct ratios: net profit margin, asset turnover, and financial leverage.
This is known as the Dupont Formula:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
The 1st component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue Ferrari can generate with its current asset base. And lastly, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is.
Since ROE can be increased through excessive borrowing, we should check Ferrari’s historic debt-to-equity ratio.
Currently the debt-to-equity ratio stands at a high 200%, which means its above-average ROE is driven by significant debt levels and it must be noted that Ferrari is paying that cheap debt down very fast.
I like Ferrari, have been Bullish since late July 2016, it pays a dividend, it is an Aristocrat stock.
|NYSE:RACE||127.34||24 August 2018||2.55||126.26||128.13||126.26||322,733|
|HeffX-LTN Analysis for RACE:||Overall||Short||Intermediate||Long|
|Bearish (-0.25)||Bearish (-0.38)||Neutral (0.02)||Bearish (-0.39)|
Have a terrific weekend