Kogan.com (ASX:KGN): ROCE Rollercoaster Highlights Capital Allocation Woes and Value at Risk

Kogan.com's journey from a high-flying e-commerce disruptor to a cautionary tale of capital efficiency struggles underscores a critical question: Can its recent recovery mask deeper structural flaws? A deep dive into its Return on Capital Employed (ROCE) and capital allocation strategy reveals a company balancing fragile gains with lingering risks.

ROCE: A Turbulent Narrative

Kogan's ROCE—a key metric for evaluating how effectively capital is deployed—has been anything but stable. From a robust 19% in 2021, it plummeted to -15% in 2022, briefly turned positive at 3.8% in 2024, and rebounded to 24.9% in 2025 (see chart below). This volatility reflects missteps in capital allocation and operational execution, rather than a steady path to efficiency.

The Capital Allocation Conundrum

The decline in ROCE coincides with several strategic misallocations:

1. Over-Reliance on Inventory-Heavy Models
   Despite shifting toward the low-inventory Kogan Marketplace (now contributing ~30% of gross sales), Kogan's asset turnover ratio lagged peers until 2025. Its inventory turnover barely budged from 3.93 to 3.94 between 2021–2025, suggesting lingering inefficiencies in managing proprietary inventory. This contrasts with platform-driven peers like Amazon, where asset-light models boost capital efficiency.

2. Cost Bloat and Margin Erosion
   Kogan's EBITDA margin shrank to -15% in 2023 due to overstaffing and poor cost discipline during the pandemic, despite minimal debt (debt-to-equity ratio: 0% in 2025). While 2024–2025 brought margin improvements, its trailing ROIC (0.18%) still trails its WACC (15.8%), indicating capital is not yet generating sufficient returns to justify its cost.

3. Overextension in Non-Core Ventures
   Investments in ventures like Mighty Ape (a U.K. marketplace) and unprofitable logistics expansions diverted capital from high-ROI areas. These moves contributed to a 25% share price drop in early 2025, despite later recovery.

Operational Turnaround or Smoke and Mirrors?

Kogan's 2025 rebound—driven by Marketplace growth (up 40% YoY) and Kogan FIRST subscriptions (1.2M members)—masks unresolved issues:
- ROIC vs. WACC Gap: The ROIC-WACC disparity suggests capital is still underperforming. Closing this gap requires sustainable margin expansion, not just top-line growth.
- Profitability Volatility: While 2025's EPS of AU$0.10 is positive, it's half the 2021 level, and consensus forecasts have been revised downward 19% since early 2025.

Investment Implications

For investors, the risks outweigh the rewards at current levels:
- Valuation Risks: The PE ratio has fallen to 9.29 (2025), but this is partly due to inflated earnings. A Price/Sales ratio of 0.4x is cheap, but only if growth stabilizes.
- Wait for Proof: Avoid chasing the recent 26% share price rebound. Wait for 2026 results to confirm ROIC crosses WACC (15.8%) sustainably.
- Dividend Caution: The 1.51% dividend yield is appealing, but payout ratios swung from 769% in 2024 to 52% in 2025—a sign of instability.

Final Verdict: Proceed with Caution

Kogan's recovery is real but fragile. While its pivot to a platform-first strategy (Marketplace + subscriptions) holds long-term promise, the ROIC-WACC gap and past capital missteps suggest caution.

Recommendation:
- Hold: For long-term investors willing to bet on Kogan's platform scale-up.
- Avoid: Until ROIC exceeds WACC and earnings consistency improves.

In a sector where capital efficiency determines survival, Kogan's story is far from over. The next 12 months will reveal whether this turnaround is a blip—or a breakthrough.