MakeMyTrip's (NASDAQ:MMYT) Weak Earnings May Only Reveal A Part Of The Whole Picture

Investors weren't pleased with the recent soft earnings report from MakeMyTrip Limited (NASDAQ:MMYT). Our analysis suggests that while the headline numbers were soft, there are some positive factors which shareholders may have missed.

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Examining Cashflow Against MakeMyTrip's Earnings

One key financial ratio used to measure how well a company converts its profit to free cash flow (FCF) is the accrual ratio. In plain english, this ratio subtracts FCF from net profit, and divides that number by the company's average operating assets over that period. You could think of the accrual ratio from cashflow as the 'non-FCF profit ratio'.

As a result, a negative accrual ratio is a positive for the company, and a positive accrual ratio is a negative. That is not intended to imply we should worry about a positive accrual ratio, but it's worth noting where the accrual ratio is rather high. Notably, there is some academic evidence that suggests that a high accrual ratio is a bad sign for near-term profits, generally speaking.

For the year to March 2025, MakeMyTrip had an accrual ratio of -0.11. Therefore, its statutory earnings were quite a lot less than its free cashflow. To wit, it produced free cash flow of US$174m during the period, dwarfing its reported profit of US$95.1m. MakeMyTrip's free cash flow improved over the last year, which is generally good to see. Unfortunately for shareholders, the company has also been issuing new shares, diluting their share of future earnings.

That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.

One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. In fact, MakeMyTrip increased the number of shares on issue by 16% over the last twelve months by issuing new shares. Therefore, each share now receives a smaller portion of profit. To celebrate net income while ignoring dilution is like rejoicing because you have a single slice of a larger pizza, but ignoring the fact that the pizza is now cut into many more slices. You can see a chart of MakeMyTrip's EPS by clicking here.

How Is Dilution Impacting MakeMyTrip's Earnings Per Share (EPS)?

MakeMyTrip was losing money three years ago. Even looking at the last year, profit was still down 56%. Sadly, earnings per share fell further, down a full 57% in that time. Therefore, the dilution is having a noteworthy influence on shareholder returns.

If MakeMyTrip's EPS can grow over time then that drastically improves the chances of the share price moving in the same direction. But on the other hand, we'd be far less excited to learn profit (but not EPS) was improving. For that reason, you could say that EPS is more important that net income in the long run, assuming the goal is to assess whether a company's share price might grow.

Our Take On MakeMyTrip's Profit Performance

In conclusion, MakeMyTrip has a strong cashflow relative to earnings, which indicates good quality earnings, but the dilution means its earnings per share are dropping faster than its profit. Based on these factors, it's hard to tell if MakeMyTrip's profits are a reasonable reflection of its underlying profitability. So while earnings quality is important, it's equally important to consider the risks facing MakeMyTrip at this point in time. For example, we've discovered 2 warning signs that you should run your eye over to get a better picture of MakeMyTrip.

Our examination of MakeMyTrip has focussed on certain factors that can make its earnings look better than they are. But there are plenty of other ways to inform your opinion of a company. For example, many people consider a high return on equity as an indication of favorable business economics, while others like to 'follow the money' and search out stocks that insiders are buying. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.