The Trend Of High Returns At Monolithic Power Systems (NASDAQ:MPWR) Has Us Very Interested

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. And in light of that, the trends we're seeing at Monolithic Power Systems' (NASDAQ:MPWR) look very promising so lets take a look.

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. The formula for this calculation on Monolithic Power Systems is:

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

0.26 = US$399m ÷ (US$1.8b - US$254m) (Based on the trailing twelve months to June 2022).

Therefore, Monolithic Power Systems has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 15%.

See our latest analysis for Monolithic Power Systems

Above you can see how the current ROCE for Monolithic Power Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Monolithic Power Systems.

So How Is Monolithic Power Systems' ROCE Trending?

The trends we've noticed at Monolithic Power Systems are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 26%. The amount of capital employed has increased too, by 203%. So we're very much inspired by what we're seeing at Monolithic Power Systems thanks to its ability to profitably reinvest capital.

What We Can Learn From Monolithic Power Systems' ROCE

In summary, it's great to see that Monolithic Power Systems can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Monolithic Power Systems can keep these trends up, it could have a bright future ahead.

Like most companies, Monolithic Power Systems does come with some risks, and we've found 1 warning sign that you should be aware of.

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.