Has Sirma Group Holding AD (BUL:SKK) Got What It Takes To Become A Multi-Bagger?

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Sirma Group Holding AD (BUL:SKK), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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).

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

Check out 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, you can check out the forecasts from the analysts covering Sirma Group Holding AD here for free.

So How Is Sirma Group Holding AD's ROCE Trending?

When we looked at the ROCE trend at Sirma Group Holding AD, we didn't gain much confidence. Around five years ago the returns on capital were 5.4%, but since then they've fallen to 4.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

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 in the last five years, the stock has given away 54% so the market doesn't look too hopeful on these trends strengthening any time soon. 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, we've spotted 2 warning signs facing Sirma Group Holding AD that you might find interesting.

While Sirma Group Holding AD 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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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.
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