Here's What To Make Of Array Technologies' (NASDAQ:ARRY) Decelerating Rates Of Return

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, the ROCE of Array Technologies (NASDAQ:ARRY) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Array Technologies:

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

0.15 = US$210m ÷ (US$1.8b - US$401m) (Based on the trailing twelve months to September 2023).

Thus, Array Technologies has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 13% generated by the Electrical industry.

See our latest analysis for Array Technologies

Above you can see how the current ROCE for Array Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Array Technologies here for free.

What Can We Tell From Array Technologies' ROCE Trend?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 15% for the last four years, and the capital employed within the business has risen 301% in that time. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On a side note, Array Technologies has done well to reduce current liabilities to 23% of total assets over the last four years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Array Technologies' ROCE

In the end, Array Technologies has proven its ability to adequately reinvest capital at good rates of return. Yet over the last three years the stock has declined 63%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

On a final note, we've found 1 warning sign for Array Technologies that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.