Returns On Capital At Shoals Technologies Group (NASDAQ:SHLS) Have Stalled

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Shoals Technologies Group (NASDAQ:SHLS), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Shoals Technologies Group is:

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

0.087 = US$65m ÷ (US$825m - US$80m) (Based on the trailing twelve months to March 2024).

Thus, Shoals Technologies Group has an ROCE of 8.7%. Ultimately, that's a low return and it under-performs the Electrical industry average of 14%.

Check out our latest analysis for Shoals Technologies Group

In the above chart we have measured Shoals Technologies Group'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 Shoals Technologies Group for free.

So How Is Shoals Technologies Group's ROCE Trending?

In terms of Shoals Technologies Group's historical ROCE trend, it doesn't exactly demand attention. The company has employed 335% more capital in the last five years, and the returns on that capital have remained stable at 8.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

What We Can Learn From Shoals Technologies Group's ROCE

Long story short, while Shoals Technologies Group has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 71% over the last three years. Therefore based on the analysis done in this article, we don't think Shoals Technologies Group has the makings of a multi-bagger.

One more thing, we've spotted 1 warning sign facing Shoals Technologies Group that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.