What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Monolithic Power Systems, this is the formula:

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

0.20 = US$453m ÷ (US$2.6b - US$312m) (Based on the trailing twelve months to March 2024).

Thus, Monolithic Power Systems has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 8.9% earned by companies in a similar industry.

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 analyst report for Monolithic Power Systems .

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Monolithic Power Systems. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 200% more capital is being employed now too. 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

All in all, it's terrific to see that Monolithic Power Systems is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 448% 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.

One more thing to note, we've identified 2 warning signs with Monolithic Power Systems and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com