MakeMyTrip's (NASDAQ:MMYT) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at MakeMyTrip (NASDAQ:MMYT) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on MakeMyTrip is:

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

0.039 = US$36m ÷ (US$1.4b - US$482m) (Based on the trailing twelve months to June 2023).

Thus, MakeMyTrip has an ROCE of 3.9%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.6%.

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.

The Trend Of ROCE

It's great to see that MakeMyTrip has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 36% 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. MakeMyTrip could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 34% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In a nutshell, we're pleased to see that MakeMyTrip has been able to generate higher returns from less capital. Since the stock has only returned 15% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. 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.

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.