Investors Will Want MakeMyTrip's (NASDAQ:MMYT) Growth In ROCE To Persist

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Speaking of which, we noticed some great changes in MakeMyTrip's (NASDAQ:MMYT) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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 MakeMyTrip:

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).

Therefore, MakeMyTrip has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 11%.

Our analysis indicates that MMYT is potentially overvalued!

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'd like to see what analysts are forecasting going forward, you should check out our free report for MakeMyTrip.

What Can We Tell From MakeMyTrip's ROCE Trend?

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. Additionally, the business is utilizing 33% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

The Bottom Line 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. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.4% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

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.

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. 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.