Investors Will Want MakeMyTrip's (NASDAQ:MMYT) Growth In ROCE To Persist
There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at MakeMyTrip (NASDAQ:MMYT) so let's look a bit deeper.
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. The formula for this calculation on MakeMyTrip is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0051 = US$5.6m ÷ (US$1.3b - US$234m) (Based on the trailing twelve months to September 2022).
Thus, MakeMyTrip has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 11%.
Check out our latest analysis for MakeMyTrip
Above you can see how the current ROCE for MakeMyTrip compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
It's great to see that MakeMyTrip has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 0.5% on their capital employed. In regards to capital employed, MakeMyTrip is using 33% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. MakeMyTrip could be selling under-performing assets since the ROCE is improving.
The Bottom Line On MakeMyTrip's ROCE
In summary, it's great to see that MakeMyTrip has been able to turn things around and earn higher returns on lower amounts of capital. Since the stock has only returned 1.4% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
While MakeMyTrip looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MMYT is currently trading for a fair price.
While MakeMyTrip isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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