K2 F&B Holdings (HKG:2108) Could Be Struggling To Allocate Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at K2 F&B Holdings (HKG:2108) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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$3.4m ÷ (S$201m - S$24m) (Based on the trailing twelve months to June 2024).

Therefore, 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 7.0%.

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 covering K2 F&B Holdings' 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 five years, returns on capital have decreased to 1.9% from 3.7% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

In summary, despite lower returns in the short term, we're encouraged to see that K2 F&B Holdings is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 23% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 3 warning signs for K2 F&B Holdings (1 is a bit unpleasant) 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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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.