Returns On Capital At Prosper Construction Holdings (HKG:6816) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Prosper Construction Holdings (HKG:6816), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Prosper Construction Holdings:

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

0.074 = HK$91m ÷ (HK$4.5b - HK$3.3b) (Based on the trailing twelve months to June 2022).

Thus, Prosper Construction Holdings has an ROCE of 7.4%. Even though it's in line with the industry average of 7.0%, it's still a low return by itself.

Check out our latest analysis for Prosper Construction Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Prosper Construction Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Prosper Construction Holdings, check out these free graphs here.

So How Is Prosper Construction Holdings' ROCE Trending?

On the surface, the trend of ROCE at Prosper Construction Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 18% over the last five years. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 73%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Prosper Construction Holdings' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Prosper Construction Holdings is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 20% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to know some of the risks facing Prosper Construction Holdings we've found 6 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

While Prosper Construction 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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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.