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Why We Like Marathon Petroleum Corporation’s (NYSE:MPC) 12% Return On Capital Employed

Simply Wall St

Today we are going to look at Marathon Petroleum Corporation (NYSE:MPC) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Marathon Petroleum:

0.12 = US$5.2b ÷ (US$53b – US$9.6b) (Based on the trailing twelve months to December 2018.)

So, Marathon Petroleum has an ROCE of 12%.

See our latest analysis for Marathon Petroleum

Does Marathon Petroleum Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Marathon Petroleum’s ROCE is meaningfully higher than the 8.9% average in the Oil and Gas industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Marathon Petroleum’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Marathon Petroleum’s current ROCE of 12% is lower than its ROCE in the past, which was 21%, 3 years ago. So investors might consider if it has had issues recently.

NYSE:MPC Past Revenue and Net Income, March 2nd 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Remember that most companies like Marathon Petroleum are cyclical businesses. Since the future is so important for investors, you should check out our free report on analyst forecasts for Marathon Petroleum.

Marathon Petroleum’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Marathon Petroleum has total liabilities of US$9.6b and total assets of US$53b. Therefore its current liabilities are equivalent to approximately 18% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Marathon Petroleum’s ROCE

With that in mind, Marathon Petroleum’s ROCE appears pretty good. Of course you might be able to find a better stock than Marathon Petroleum. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.