Capital Allocation Trends At K2 F&B Holdings (HKG:2108) Aren't Ideal

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at K2 F&B Holdings (HKG:2108), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on K2 F&B Holdings is:

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

0.026 = S$4.1m ÷ (S$168m - S$15m) (Based on the trailing twelve months to December 2021).

So, K2 F&B Holdings has an ROCE of 2.6%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 1.6%.

See our latest analysis for K2 F&B Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for K2 F&B Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of K2 F&B Holdings, check out these free graphs here.

What Does the ROCE Trend For K2 F&B Holdings Tell Us?

In terms of K2 F&B Holdings' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 6.1% over the last five years. 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 Key Takeaway

To conclude, we've found that K2 F&B Holdings 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 37% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about K2 F&B Holdings, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

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.