There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 ScanSource (NASDAQ:SCSC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Our free stock report includes 1 warning sign investors should be aware of before investing in ScanSource. Read for free now.

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 ScanSource, this is the formula:

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

0.081 = US$89m ÷ (US$1.7b - US$610m) (Based on the trailing twelve months to December 2024).

Therefore, ScanSource has an ROCE of 8.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 10%.

See our latest analysis for ScanSource

Above you can see how the current ROCE for ScanSource 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 ScanSource for free.

What Does the ROCE Trend For ScanSource Tell Us?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 21% in that same period. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

In Conclusion...

It's a shame to see that ScanSource is effectively shrinking in terms of its capital base. Unsurprisingly, the stock has only gained 39% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

ScanSource does have some risks though, and we've spotted 1 warning sign for ScanSource that you might be interested in.

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.