The Return Trends At Shoals Technologies Group (NASDAQ:SHLS) Look Promising

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Shoals Technologies Group (NASDAQ:SHLS) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Shoals Technologies Group:

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

0.11 = US$82m ÷ (US$809m - US$65m) (Based on the trailing twelve months to March 2023).

Thus, Shoals Technologies Group has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

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, you can check out the forecasts from the analysts covering Shoals Technologies Group here for free.

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

We like the trends that we're seeing from Shoals Technologies Group. The data shows that returns on capital have increased substantially over the last four years to 11%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 334%. So we're very much inspired by what we're seeing at Shoals Technologies Group thanks to its ability to profitably reinvest capital.

What We Can Learn From 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 with a respectable 49% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Shoals Technologies Group can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with Shoals Technologies Group and understanding them should be part of your investment process.

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.