Shoals Technologies Group (NASDAQ:SHLS) Is Experiencing Growth In Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. So on that note, Shoals Technologies Group (NASDAQ:SHLS) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Shoals Technologies Group, this is the formula:

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

0.14 = US$101m ÷ (US$819m - US$77m) (Based on the trailing twelve months to June 2023).

Thus, Shoals Technologies Group has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 13% generated by the Electrical industry.

View 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 to see what analysts are forecasting going forward, you should check out our free report for Shoals Technologies Group.

The Trend Of ROCE

The trends we've noticed at Shoals Technologies Group are quite reassuring. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 14%. The amount of capital employed has increased too, by 340%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Bottom Line On Shoals Technologies Group's ROCE

In summary, it's great to see that Shoals Technologies Group can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 25% over the last year, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Shoals Technologies Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Shoals Technologies Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.