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# What Should Investors Know About Prosper Construction Holdings Limited’s (HKG:6816) Return On Capital?

I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Prosper Construction Holdings Limited (HKG:6816).

Purchasing Prosper Construction Holdings gives you an ownership stake in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Prosper Construction Holdings’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.

### What is Return on Capital Employed (ROCE)?

When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. To determine Prosper Construction Holdings’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). 6816’s ROCE is calculated below:

ROCE Calculation for 6816

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = HK\$60m ÷ (HK\$885m – HK\$363m) = 11%

As you can see, 6816 earned HK\$11.5 from every HK\$100 you invested over the previous twelve months. A good ROCE hurdle you should aim for in your investments is 15%, which 6816 has just fallen short of, meaning the company creates an unideal amount of earnings from capital employed.

### What is causing this?

6816 doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of 6816’s ROCE and understand what is happening to the individual components. Looking three years in the past, it is evident that 6816’s ROCE has deteriorated from 44%, indicating the company’s capital returns have declined. Conversely, the movement in the earnings variable shows a jump from HK\$45m to HK\$60m albeit capital employed has improved by a proportionally greater amount because of a hike in the level of total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.

### Next Steps

ROCE for 6816 investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 6816 or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for 6816’s future growth? Take a look at our free research report of analyst consensus for 6816’s outlook.
2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Prosper Construction Holdings’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.