Yahoo Finance Did Marathon Petroleum Corporation (NYSE:MPC) Create Value For Shareholders?
The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to better understand how you can grow your money by investing in Marathon Petroleum Corporation (NYSE:MPC).
Marathon Petroleum Corporation (NYSE:MPC) outperformed the Oil and Gas Refining and Marketing industry on the basis of its ROE – producing a higher 19.83% relative to the peer average of 11.36% over the past 12 months. Superficially, this looks great since we know that MPC has generated big profits with little equity capital; however, ROE doesn’t tell us how much MPC has borrowed in debt. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of MPC’s ROE. Check out our latest analysis for Marathon Petroleum
What you must know about ROE
Return on Equity (ROE) is a measure of Marathon Petroleum’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.20 in earnings from this. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Marathon Petroleum, which is 10.86%. Since Marathon Petroleum’s return covers its cost in excess of 8.97%, its use of equity capital is efficient and likely to be sustainable. Simply put, Marathon Petroleum pays less for its capital than what it generates in return. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue Marathon Petroleum can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check Marathon Petroleum’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a reasonable 86.89%, which means its above-average ROE is driven by its ability to grow its profit without a significant debt burden.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. Marathon Petroleum’s above-industry ROE is encouraging, and is also in excess of its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. Although ROE can be a useful metric, it is only a small part of diligent research.
For Marathon Petroleum, I’ve compiled three fundamental factors you should look at:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Marathon Petroleum worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Marathon Petroleum is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Marathon Petroleum? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
