Is Castro Model Ltd.'s (TLV:CAST) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 13% over the past week, it is easy to disregard Castro Model (TLV:CAST). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Castro Model's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Castro Model is:

8.6% = ₪97m ÷ ₪1.1b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.09 in profit.

Check out our latest analysis for Castro Model

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Castro Model's Earnings Growth And 8.6% ROE

When you first look at it, Castro Model's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 14% either. In spite of this, Castro Model was able to grow its net income considerably, at a rate of 31% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Castro Model's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.5% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Castro Model's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Castro Model Using Its Retained Earnings Effectively?

Castro Model has very a high three-year median payout ratio of 173% suggesting that the company's shareholders are getting paid from more than just the company's earnings. Despite this, the company's earnings grew significantly as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. You can see the 2 risks we have identified for Castro Model by visiting our risks dashboard for free on our platform here.

Besides, Castro Model has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that the performance shown by Castro Model can be open to many interpretations. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Up till now, we've only made a short study of the company's growth data. To gain further insights into Castro Model's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.