Return on capital employed (RoCE) is a financial ratio that determines a company’s ability to use capital to earn profits. Unlike return on equity (ROE), RoCE gives us a more holistic view of the company’s ability to use all of its capital and in order to generate profits.
This week's chart looks at the RoCE of internet software & services companies, from the old to the new.
The results suggest that older internet companies are more efficient in generating returns from the available capital. Older companies like Tanla Platforms, Affle (India), IndiaMART InterMESH and Info Edge have higher and positive RoCE values, compared to their newer competitors like FSN E-Commerce Ventures (Nykaa), Zomato, PB Fintech and One97 Communications (Paytm).
One reason for this could be that companies like Affle and Tanla Platforms, which are heavily focused on B2B rather than B2C businesses, had already figured out the optimal business model by the time of their IPO. . Meanwhile, the newer clutch of internet companies are still finding a path to profitability - such as Zomato, which has recently decided to target home services.
As a result, the new internet companies (except for Nykaa) are loss-making, using up cash for expenses like marketing, user acquisition and to drive growth.
Tanla Platforms’ annual RoCE for FY22 has jumped 200 bps to 48%, which is higher than the average industry RoCE of 25.5. This helped the company’s three-year average RoCE to grow to 23%.
Affle (India)’s three-year average RoCE is at 25%, compared to its five-year average of 30%. After plunging 9.1 percentage points to 18% in FY22, its current RoCE level is below the industry average.
Most newer internet companies have negative returns on capital employed. Zomato has the lowest five-year average of -41%, However, its three-year average returns have improved to -39%, despite its RoCE declining by 310 bps to -9% in FY22.
One97 Communications (Paytm) also has a negative five-year average RoCE of -27%. However, its three-year average returns improved by 400 bps, owing to a 6.6 percentage boost in FY22.
