It’s hard to get excited after seeing Monolithic Power Systems’ (NASDAQ: MPWR ) performance, when the stock has dropped 25% in the past three months. However, stock prices are usually driven by the company’s financial performance over the long term, which in this case seems quite promising. In this article, we decided to focus Monolithic Power System ROE.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures the company’s profitability in relation to shareholders’ equity.
How to Calculate Return on Equity?
The formula for return on equity Is:
Return on Equity = Net Profit (from continuing operations) ÷ Stockholders’ Equity
So, based on the formula above, the ROE for a Monolithic Power System is:
26% = US$391m ÷ US$1.5b (Based on trailing twelve months to September 2022).
‘Returns’ are profits over the last twelve months. So, this means that for every $1 of its shareholders’ investment, the company makes a profit of $0.26.
What is the Relationship Between ROE and Earnings Growth?
So far, we have learned that ROE is a measure of a company’s profitability. Based on how much profit a company chooses to reinvest or “retain”, we can then evaluate the company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily bear these characteristics.
Side by Side Comparison of Monolithic Power Systems Revenue Growth and 26% ROE
To begin with, Monolithic Power Systems has a fairly high ROE which is impressive. Second, the comparison with the industry-reported average ROE of 19% is also not taken into account by us. So, the massive 33% net income growth that Monolithic Power Systems has seen over the past five years isn’t too surprising.
Furthermore, when comparing with the industry’s net income growth, we found that Monolithic Power Systems’ growth is quite high when compared to the industry average growth of 26% during the same period, which is good to see.
The basis for attaching value to a company is, to a great extent, tied to the growth of its earnings. What investors need to determine next is if the expected earnings growth, or lack thereof, has been built into the share price. This then helps them determine if the stock is saved for a bright or gloomy future. Is MPWR reasonably priced? this infographic about the intrinsic value of the company has everything you need to know.
Do Monolithic Power Systems Make Efficient Use Of Their Benefits?
Monolithic Power Systems has a significant three-year median payout ratio of 54%, meaning the company retains only 46% of its earnings. This means that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.
Additionally, Monolithic Power Systems has been paying dividends for eight years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s forward payout ratio is expected to fall to 22% over the next three years. Although the expected payout ratio is lower, the company’s ROE is not expected to change by much.
In general, we feel that Monolithic Power Systems’ performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely made by its high ROE. While the company pays most of its earnings as dividends, it has been able to grow its earnings despite that, so that’s a good sign. Because of this, the company’s earnings growth is expected to slow down, as predicted in current analyst estimates. To know more about the company’s future earnings growth forecast, see this free report on analyst forecasts for companies to find more.
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This article is by Simply Wall St in general. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals, 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 recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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