Sirma Group Holding AD (BUL:SGH) Is Reinvesting At Lower Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after briefly looking over the numbers, we don't think Sirma Group Holding AD (BUL:SGH) 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 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 Sirma Group Holding AD is:

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

0.042 = лв5.0m ÷ (лв141m - лв22m) (Based on the trailing twelve months to September 2020).

Therefore, Sirma Group Holding AD has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

Check out our latest analysis for Sirma Group Holding AD

In the above chart we have measured Sirma Group Holding AD'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 report for Sirma Group Holding AD.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Sirma Group Holding AD doesn't inspire confidence. To be more specific, ROCE has fallen from 5.4% over the last five years. However it looks like Sirma Group Holding AD might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Sirma Group Holding AD is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 55% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Sirma Group Holding AD (including 1 which is significant) .

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.