What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for MakeMyTrip:

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

0.054 = US$75m ÷ (US$1.7b - US$338m) (Based on the trailing twelve months to June 2024).

So, MakeMyTrip has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 10%.

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, you can check out the forecasts from the analysts covering MakeMyTrip for free.

What Does the ROCE Trend For MakeMyTrip Tell Us?

Shareholders will be relieved that MakeMyTrip has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 5.4%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Key Takeaway

To bring it all together, MakeMyTrip has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 334% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if MakeMyTrip can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing MakeMyTrip, we've discovered 1 warning sign that you should be aware of.

While MakeMyTrip may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.