There are a few key trends to look for if we want to identify the next 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Source Energy Services (TSE:SHLE) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Source Energy Services is:

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

0.13 = CA$31m ÷ (CA$322m - CA$91m) (Based on the trailing twelve months to September 2023).

Thus, Source Energy Services has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 15% generated by the Energy Services industry.

View our latest analysis for Source Energy Services

Above you can see how the current ROCE for Source Energy Services compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Source Energy Services Tell Us?

We're pretty happy with how the ROCE has been trending at Source Energy Services. The data shows that returns on capital have increased by 105% over the trailing five years. The company is now earning CA$0.1 per dollar of capital employed. In regards to capital employed, Source Energy Services appears to been achieving more with less, since the business is using 51% less capital to run its operation. Source Energy Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 28% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.