Returns On Capital At GMO Research & AI (TSE:3695) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. In light of that, when we looked at GMO Research & AI (TSE:3695) and its ROCE trend, we weren't exactly thrilled.

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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. To calculate this metric for GMO Research & AI, this is the formula:

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

0.11 = JP¥235m ÷ (JP¥3.0b - JP¥874m) (Based on the trailing twelve months to December 2024).

So, GMO Research & AI has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Media industry average of 9.4%.

Check out our latest analysis for GMO Research & AI

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GMO Research & AI .

The Trend Of ROCE

In terms of GMO Research & AI's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 15% over the last five years. However it looks like GMO Research & AI might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by GMO Research & AI's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 123% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

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

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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.