Why We Like The Returns At Monolithic Power Systems (NASDAQ:MPWR)

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Monolithic Power Systems (NASDAQ:MPWR) looks great, so lets see what the trend can tell us.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.29 = US$563m ÷ (US$2.2b - US$316m) (Based on the trailing twelve months to March 2023).

So, Monolithic Power Systems has an ROCE of 29%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

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'd like, you can check out the forecasts from the analysts covering Monolithic Power Systems here for free.

SWOT Analysis for Monolithic Power Systems

What Does the ROCE Trend For Monolithic Power Systems Tell Us?

We like the trends that we're seeing from Monolithic Power Systems. Over the last five years, returns on capital employed have risen substantially to 29%. The amount of capital employed has increased too, by 206%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

What We Can Learn From Monolithic Power Systems' ROCE

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 a remarkable 224% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Monolithic Power Systems we've found 2 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.