Monolithic Power Systems (NASDAQ:MPWR) Is Very Good At Capital Allocation

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 the ROCE trend of Monolithic Power Systems (NASDAQ:MPWR) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Monolithic Power Systems:

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

0.25 = US$517m ÷ (US$2.3b - US$250m) (Based on the trailing twelve months to September 2023).

So, Monolithic Power Systems has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 11%.

See our latest analysis for Monolithic Power Systems

In the above chart we have measured Monolithic Power Systems' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Investors would be pleased with what's happening at Monolithic Power Systems. Over the last five years, returns on capital employed have risen substantially to 25%. The amount of capital employed has increased too, by 207%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

To sum it up, Monolithic Power Systems has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 2 warning signs for Monolithic Power Systems you'll probably want to know about.

Monolithic Power Systems is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.