Distribution Solutions Group (NASDAQ:DSGR) Has More To Do To Multiply In Value Going Forward

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Distribution Solutions Group (NASDAQ:DSGR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Distribution Solutions Group:

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

0.057 = US$60m ÷ (US$1.2b - US$169m) (Based on the trailing twelve months to December 2022).

Therefore, Distribution Solutions Group has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 16%.

View our latest analysis for Distribution Solutions Group

Above you can see how the current ROCE for Distribution Solutions Group 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 Distribution Solutions Group here for free.

SWOT Analysis for Distribution Solutions Group

How Are Returns Trending?

The returns on capital haven't changed much for Distribution Solutions Group in recent years. The company has consistently earned 5.7% for the last one year, and the capital employed within the business has risen 278% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Distribution Solutions Group has done well to reduce current liabilities to 14% of total assets over the last one year. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

In Conclusion...

In conclusion, Distribution Solutions Group has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 15% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 4 warning signs we've spotted with Distribution Solutions Group (including 1 which is potentially serious) .

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.