Investors Could Be Concerned With K2 F&B Holdings' (HKG:2108) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. Having said that, from a first glance at K2 F&B Holdings (HKG:2108) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for K2 F&B Holdings, this is the formula:

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

0.019 = S$2.6m ÷ (S$148m - S$8.9m) (Based on the trailing twelve months to December 2020).

So, K2 F&B Holdings has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 2.6%.

View 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're interested in investigating K2 F&B Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at K2 F&B Holdings, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.9% from 5.4% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On K2 F&B Holdings' ROCE

We're a bit apprehensive about K2 F&B Holdings because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 96% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 6 warning signs for K2 F&B Holdings (of which 2 are a bit unpleasant!) that you should know about.

While K2 F&B Holdings 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.

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