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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Monolithic Power Systems' (NASDAQ:MPWR) returns on capital, so let's have a look.
Understanding 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)
0.16 = US$539m ÷ (US$3.6b - US$295m) (Based on the trailing twelve months to December 2024).
Therefore, Monolithic Power Systems has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 7.1% it's much better.
View 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 for free.
What Does the ROCE Trend For Monolithic Power Systems Tell Us?
We like the trends that we're seeing from Monolithic Power Systems. The data shows that returns on capital have increased substantially over the last five years to 16%. 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 287%. So we're very much inspired by what we're seeing at Monolithic Power Systems thanks to its ability to profitably reinvest capital.
The Bottom Line On 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. Since the stock has returned a staggering 297% to shareholders over the last five years, it looks like investors are recognizing these changes. 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.