Sirma Group Holding AD's (BUL:SGH) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 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. To calculate this metric for Sirma Group Holding AD, this is the formula:

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

0.041 = лв4.9m ÷ (лв141m - лв22m) (Based on the trailing twelve months to September 2020).

Therefore, Sirma Group Holding AD has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

See our latest analysis for Sirma Group Holding AD

Above you can see how the current ROCE for Sirma Group Holding AD 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 report for Sirma Group Holding AD.

What Does the ROCE Trend For Sirma Group Holding AD Tell Us?

On the surface, the trend of ROCE at Sirma Group Holding AD doesn't inspire confidence. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 4.1%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Sirma Group Holding AD's ROCE

Bringing it all together, while we're somewhat encouraged by Sirma Group Holding AD's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 54% in the last five years. Therefore based on the analysis done in this article, we don't think Sirma Group Holding AD has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Sirma Group Holding AD and understanding them should be part of your investment process.

While Sirma Group Holding AD 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.

If you decide to trade Sirma Group Holding AD, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.