If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So, when we ran our eye over Global Mofy AI's (NASDAQ:GMM) trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Global Mofy AI:

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

0.31 = US$14m ÷ (US$50m - US$5.8m) (Based on the trailing twelve months to March 2024).

So, Global Mofy AI has an ROCE of 31%. That's a fantastic return and not only that, it outpaces the average of 11% earned by companies in a similar industry.

View our latest analysis for Global Mofy AI

Historical performance is a great place to start when researching a stock so above you can see the gauge for Global Mofy AI's ROCE against it's prior returns. If you're interested in investigating Global Mofy AI's past further, check out this free graph covering Global Mofy AI's past earnings, revenue and cash flow.

So How Is Global Mofy AI's ROCE Trending?

We'd be pretty happy with returns on capital like Global Mofy AI. Over the past three years, ROCE has remained relatively flat at around 31% and the business has deployed 3,249% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Global Mofy AI can keep this up, we'd be very optimistic about its future.

On a side note, Global Mofy AI has done well to reduce current liabilities to 12% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

Global Mofy AI has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. What's surprising though is that the stock has collapsed 92% over the last year, so there might be other areas of the business hurting its prospects. So in light of that'd we think it's worthwhile looking further into this stock to see if there's any areas for concern.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Global Mofy AI (of which 1 is a bit unpleasant!) that you should know about.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.