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Returns On Capital At ScanSource (NASDAQ:SCSC) Have Stalled
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at ScanSource (NASDAQ:SCSC), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for ScanSource:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.09 = US$102m ÷ (US$1.8b - US$643m) (Based on the trailing twelve months to March 2024).
Therefore, ScanSource has an ROCE of 9.0%. On its own, that's a low figure but it's around the 11% average generated by the Electronic industry.
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 to see what analysts are forecasting going forward, you should check out our free analyst report for ScanSource .
How Are Returns Trending?
There hasn't been much to report for ScanSource's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at ScanSource in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
In Conclusion...
In summary, ScanSource isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has gained an impressive 59% over the last five years, 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 more thing, we've spotted 1 warning sign facing ScanSource that you might find interesting.
While ScanSource isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NasdaqGS:SCSC
ScanSource
Engages in the distribution of technology products and solutions in the United States and internationally.
Flawless balance sheet and fair value.
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