If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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).
Thus, Monolithic Power Systems has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.
Check out our latest analysis for Monolithic Power Systems
NasdaqGS:MPWR Return on Capital Employed September 26th 2022Above 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, you can check out the forecasts from the analysts covering Monolithic Power Systems here for free.
What The Trend Of ROCE Can Tell Us
The trends we've noticed at Monolithic Power Systems are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 26%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital 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.
Our Take On Monolithic Power Systems' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Monolithic Power Systems has. And a remarkable 263% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.
Monolithic Power Systems does have some risks though, and we've spotted 1 warning sign for Monolithic Power Systems that you might be interested in.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
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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.