The Returns On Capital At Prosperous Industrial (Holdings) (HKG:1731) Don't Inspire Confidence

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Prosperous Industrial (Holdings) (HKG:1731) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Prosperous Industrial (Holdings):

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

0.02 = US$2.8m ÷ (US$185m - US$40m) (Based on the trailing twelve months to June 2022).

So, Prosperous Industrial (Holdings) has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Luxury industry average of 10%.

Check out our latest analysis for Prosperous Industrial (Holdings)

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

What Does the ROCE Trend For Prosperous Industrial (Holdings) Tell Us?

On the surface, the trend of ROCE at Prosperous Industrial (Holdings) doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.0% from 20% five years ago. 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.

On a related note, Prosperous Industrial (Holdings) has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Prosperous Industrial (Holdings). These growth trends haven't led to growth returns though, since the stock has fallen 49% over the last three years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 3 warning signs we've spotted with Prosperous Industrial (Holdings) (including 1 which is potentially serious) .

While Prosperous Industrial (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.