Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after investigating ScanSource (NASDAQ:SCSC), we don't think it's current trends fit the mold of a multi-bagger.

What Is 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. Analysts use this formula to calculate it for ScanSource:

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

0.086 = US$96m ÷ (US$1.8b - US$666m) (Based on the trailing twelve months to September 2024).

Thus, ScanSource has an ROCE of 8.6%. In absolute terms, that's a low return but it's around the Electronic industry average of 10%.

In the above chart we have measured ScanSource'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 ScanSource .

The Trend Of ROCE

Over the past five years, ScanSource's ROCE has remained relatively flat while the business is using 21% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 8.6%, it's hard to get excited about these developments.

In Conclusion...

In summary, ScanSource isn't reinvesting funds back into the business and returns aren't growing. And with the stock having returned a mere 32% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

ScanSource could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for SCSC on our platform quite valuable.

While ScanSource 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.