La Kaffa International (GTSM:2732) Will Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at La Kaffa International (GTSM:2732) 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)?

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 La Kaffa International, this is the formula:

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

0.095 = NT$266m ÷ (NT$4.5b - NT$1.7b) (Based on the trailing twelve months to December 2020).

So, La Kaffa International has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 5.9% generated by the Hospitality industry, it's much better.

View our latest analysis for La Kaffa International

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 La Kaffa International's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at La Kaffa International, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.5% from 18% 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 La Kaffa International's ROCE

In summary, we're somewhat concerned by La Kaffa International's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 130% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 3 warning signs for La Kaffa International that we think you should be aware of.

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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