If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Shoals Technologies Group (NASDAQ:SHLS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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)

0.094 = US$67m ÷ (US$801m - US$92m) (Based on the trailing twelve months to September 2024).

Thus, Shoals Technologies Group has an ROCE of 9.4%. On its own, that's a low figure but it's around the 11% average 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 analyst report for Shoals Technologies Group .

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

In terms of Shoals Technologies Group's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.4%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Shoals Technologies Group's ROCE

Bringing it all together, while we're somewhat encouraged by Shoals Technologies Group's reinvestment in its own business, we're aware that returns are shrinking. Moreover, since the stock has crumbled 82% over the last three years, it appears investors are expecting the worst. Therefore based on the analysis done in this article, we don't think Shoals Technologies Group has the makings of a multi-bagger.

If you'd like to know about the risks facing Shoals Technologies Group, we've discovered 2 warning signs that you should be aware of.

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.