Is Monolithic Power Systems, Inc.'s (NASDAQ:MPWR) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Monolithic Power Systems' (NASDAQ:MPWR) stock increased significantly by 16% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Monolithic Power Systems' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Monolithic Power Systems is:

56% = US$1.8b ÷ US$3.3b (Based on the trailing twelve months to March 2025).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.56 in profit.

Check out our latest analysis for Monolithic Power Systems

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Monolithic Power Systems' Earnings Growth And 56% ROE

Firstly, we acknowledge that Monolithic Power Systems has a significantly high ROE. Secondly, even when compared to the industry average of 12% the company's ROE is quite impressive. As a result, Monolithic Power Systems' exceptional 47% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Monolithic Power Systems' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Monolithic Power Systems is trading on a high P/E or a low P/E, relative to its industry.

Is Monolithic Power Systems Efficiently Re-investing Its Profits?

The three-year median payout ratio for Monolithic Power Systems is 37%, which is moderately low. The company is retaining the remaining 63%. By the looks of it, the dividend is well covered and Monolithic Power Systems is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Monolithic Power Systems has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 34%. Still, forecasts suggest that Monolithic Power Systems' future ROE will drop to 23% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Monolithic Power Systems' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.