MakeMyTrip (NASDAQ:MMYT) Might Have The Makings Of A Multi-Bagger
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at MakeMyTrip (NASDAQ:MMYT) and its trend of ROCE, we really liked what we saw.
What Is 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)
0.011 = US$12m ÷ (US$1.3b - US$235m) (Based on the trailing twelve months to December 2022).
Therefore, MakeMyTrip has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.7%.
See our latest analysis for MakeMyTrip
In the above chart we have measured MakeMyTrip's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MakeMyTrip.
So How Is MakeMyTrip's ROCE Trending?
Like most people, we're pleased that MakeMyTrip is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, MakeMyTrip is using 32% 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. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
Our Take On MakeMyTrip's ROCE
In the end, MakeMyTrip has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 26% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
On the other side of ROCE, we have to consider valuation. That's why we have a FREE intrinsic value estimation on our platform that is definitely worth checking out.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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