If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in Array Technologies' (NASDAQ:ARRY) returns on capital, so let's have a look.
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. To calculate this metric for Array Technologies, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = US$217m ÷ (US$1.7b - US$336m) (Based on the trailing twelve months to December 2023).
So, Array Technologies has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 14% generated by the Electrical industry.
NasdaqGM:ARRY Return on Capital Employed March 21st 2024
Above you can see how the current ROCE for Array Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Array Technologies for free.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Array Technologies is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 16% on its capital. Not only that, but the company is utilizing 265% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
The Bottom Line On Array Technologies' ROCE
Long story short, we're delighted to see that Array Technologies' reinvestment activities have paid off and the company is now profitable. Given the stock has declined 52% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Like most companies, Array Technologies does come with some risks, and we've found 1 warning sign that you should be aware of.
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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