Will Castles Technology (TPE:5258) Multiply In Value Going Forward?

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at Castles Technology's (TPE:5258) ROCE trend, we were pretty happy with what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Castles Technology, this is the formula:

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

0.17 = NT$319m ÷ (NT$3.7b - NT$1.8b) (Based on the trailing twelve months to September 2020).

Thus, Castles Technology has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Electronic industry.

Check out our latest analysis for Castles Technology

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

The Trend Of ROCE

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 17% for the last five years, and the capital employed within the business has risen 69% in that time. Since 17% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Another thing to note, Castles Technology has a high ratio of current liabilities to total assets of 49%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Castles Technology's ROCE

In the end, Castles Technology has proven its ability to adequately reinvest capital at good rates of return. However, despite the favorable fundamentals, the stock has fallen 15% over the last five years, so there might be an opportunity here for astute investors. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Castles Technology (of which 3 can't be ignored!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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