Returns On Capital Signal Tricky Times Ahead For Shoals Technologies Group (NASDAQ:SHLS)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shoals Technologies Group (NASDAQ:SHLS) and its ROCE trend, we weren't exactly thrilled.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.082 = US$58m ÷ (US$793m - US$81m) (Based on the trailing twelve months to December 2024).

Thus, Shoals Technologies Group has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.

View our latest analysis for Shoals Technologies Group

Above you can see how the current ROCE for Shoals Technologies Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Shoals Technologies Group .

What Can We Tell From Shoals Technologies Group's ROCE Trend?

When we looked at the ROCE trend at Shoals Technologies Group, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 8.2%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Shoals Technologies Group's ROCE

In summary, we're somewhat concerned by Shoals Technologies Group's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 67% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Shoals Technologies Group, we've discovered 1 warning sign that 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.