Advertisement
New Zealand markets closed
  • NZX 50

    11,767.40
    +68.89 (+0.59%)
     
  • NZD/USD

    0.6106
    -0.0026 (-0.42%)
     
  • ALL ORDS

    8,015.80
    +72.20 (+0.91%)
     
  • OIL

    80.21
    -0.12 (-0.15%)
     
  • GOLD

    2,323.10
    -5.90 (-0.25%)
     

Monolithic Power Systems, Inc.'s (NASDAQ:MPWR) Stock Is Going Strong: Is the Market Following Fundamentals?

Monolithic Power Systems' (NASDAQ:MPWR) stock is up by a considerable 10% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Monolithic Power Systems' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Monolithic Power Systems

How Is ROE Calculated?

The formula for ROE is:

ADVERTISEMENT

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Monolithic Power Systems is:

26% = US$438m ÷ US$1.7b (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.26 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Monolithic Power Systems' Earnings Growth And 26% ROE

Firstly, we acknowledge that Monolithic Power Systems has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 19% which is quite remarkable. So, the substantial 36% net income growth seen by Monolithic Power Systems over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Monolithic Power Systems' growth is quite high when compared to the industry average growth of 27% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Monolithic Power Systems fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Monolithic Power Systems Efficiently Re-investing Its Profits?

Monolithic Power Systems' significant three-year median payout ratio of 50% (where it is retaining only 50% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Besides, Monolithic Power Systems has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 24% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

In total, we are pretty happy with Monolithic Power Systems' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here