Is K2 F&B Holdings (HKG:2108) Likely To Turn Things Around?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at K2 F&B Holdings (HKG:2108) and its ROCE trend, we weren't exactly thrilled.

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

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. 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)

0.025 = S$3.4m ÷ (S$149m - S$14m) (Based on the trailing twelve months to June 2020).

So, K2 F&B Holdings has an ROCE of 2.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.3%.

View our latest analysis for K2 F&B Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating K2 F&B Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is K2 F&B Holdings' ROCE Trending?

When we looked at the ROCE trend at K2 F&B Holdings, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 2.5% from 5.8% four 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.

In Conclusion...

In summary, we're somewhat concerned by K2 F&B Holdings' diminishing returns on increasing amounts of capital. And, the stock has remained flat over the last year, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for K2 F&B Holdings (1 is concerning) you should be aware of.

While K2 F&B Holdings 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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