Will Prosper Construction Holdings (HKG:6816) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. In light of that, when we looked at Prosper Construction Holdings (HKG:6816) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Prosper Construction Holdings is:

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

0.053 = HK$29m ÷ (HK$1.5b - HK$952m) (Based on the trailing twelve months to June 2020).

Thus, Prosper Construction Holdings has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

See our latest analysis for Prosper Construction Holdings

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 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?

When we looked at the ROCE trend at Prosper Construction Holdings, we didn't gain much confidence. To be more specific, ROCE has fallen from 45% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 63%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 5.3%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

While returns have fallen for Prosper Construction Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 15% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 5 warning signs for Prosper Construction Holdings (3 can't be ignored) 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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This article by Simply Wall St is general in nature. 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.
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