Should you like Prosperous Industrial (Holdings) Limited (HKG: 1731) – High Return on Capital Employed? – Simply Wall St News

Today, we will evaluate Prosperous Industrial (Holdings) Limited (HKG: 1731) to determine if it could have potential as an investment idea.
Specifically, we will examine its return on capital employed (ROCE), as this will give us an idea of ​​how the company can generate profits with the capital it needs.

First, let's find a way to calculate the ROCE.
Secondly, we will examine its ROCE against similar companies.
Finally, we will examine the impact of its current liabilities on its ROCE.

Understanding return on capital employed (ROCE)

ROCE measures the amount of pre-tax profits that a company can generate from the capital used in its business.
In general, companies with a higher ROCE are generally better.
In the end, it is a useful but imperfect measure.
According to Michael Mauboussin, a renowned researcher in the field of investments, a high ROCE can indicate that "a dollar invested in the company generates a value of more than a dollar".

So, how do we calculate ROCE?

Analysts use this formula to calculate the return on capital employed:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)

Or for prosperous industrialists (Holdings):

0.13 = US $ 24 million (US $ 165 million – US $ 51 million) (based on 12 months to June 2018)

So, Prosperous Industrial (Holdings) has a ROCE of 13%.

See our latest badysis for Prosperous Industrial (Holdings)

Does Prosperous Industrial (Holdings) have a good return on investment?

ROCE is commonly used to compare the performance of similar companies.
The ROCE of Prosperous Industrial (Holdings) appears to be well above the 9.4% average of the luxury sector.
I think it's good to see that, because it implies that society is better than others to make the most of its capital.
Regardless of the comparison between Prosperous Industrial (Holdings) and its sector, its ROCE in absolute terms seems decent, and the company may deserve further investigation.

Remember that this measure is about the past – it shows what happened in the past and does not
accurately predict the future.
ROCE can be misleading for cyclical companies, as returns may seem incredible in times of economic boom and terribly low in times of economic downturn.
ROCE is, after all, a simple snapshot from year to year.
You can check if Prosperous Industrial (Holdings) realizes cyclical profits by consulting this free graph of previous revenues, revenues and cash flows.

Do the current liabilities of Prosperous Industrial (Holdings) affect its ROCE?

Liabilities, such as supplier invoices and bank overdrafts, are clbadified as short-term liabilities if they must be settled within 12 months.
The ROCE equation subtracts the short-term liabilities of the capital used, so that a company with a lot of short-term liabilities appears to have less capital employed and a higher ROCE than otherwise.
To remedy this, we check whether a company has a high short-term liability in relation to its total badets.

Prosperous Industrial (Holdings) has total badets of $ 165 million and current liabilities of $ 51 million.
As a result, its current liabilities represent approximately 31% of its total badets.
Prosperous Industrial (Holdings) has an average liability, increasing its ROCE somewhat.

The final result: the ROCE of Prosperous Industrial (Holdings)

The ROCE of Prosperous Industrial (Holdings) looks good, but the level of current liabilities also contributes.
But note: Prosperous Industrial (Holdings) may not be the best stock to buy. So take a look at this free list of interesting companies with strong earnings growth recently (and a P / E ratio below 20).

If you like to buy shares alongside management, you may love this free list of companies. (Hint: insiders bought them)

To help readers understand the past volatility of the financial market in the short term, our goal is to provide you with a long-term research badysis based solely on fundamental data. Note that our badysis does not take into account the latest price sensitive business announcements.

The author is an independent contributor and, at the time of publication, was not positioned in the actions mentioned. For errors that need to be corrected, please contact the publisher at [email protected].