How Do Marathon Oil Corporation’s (NYSE:MRO) Returns On Capital Compare To Peers?

Today we’ll look at Marathon Oil Corporation (NYSE:MRO) and reflect on its potential as an investment. 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. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

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

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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’.

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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

Or for Marathon Oil:

0.027 = US$502m ÷ (US$20b – US$1.7b) (Based on the trailing twelve months to December 2019.)

Therefore, Marathon Oil has an ROCE of 2.7%.

Check out our latest analysis for Marathon Oil

Does Marathon Oil Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Marathon Oil’s ROCE appears meaningfully below the 6.8% average reported by the Oil and Gas industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Marathon Oil stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Marathon Oil reported an ROCE of 2.7% — better than 3 years ago, when the company didn’t make a profit. That implies the business has been improving. The image below shows how Marathon Oil’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:MRO Past Revenue and Net Income April 20th 2020
NYSE:MRO Past Revenue and Net Income April 20th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Given the industry it operates in, Marathon Oil could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Marathon Oil.

How Marathon Oil’s Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Marathon Oil has total assets of US$20b and current liabilities of US$1.7b. As a result, its current liabilities are equal to approximately 8.6% of its total assets. With barely any current liabilities, there is minimal impact on Marathon Oil’s admittedly low ROCE.

What We Can Learn From Marathon Oil’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course, you might also be able to find a better stock than Marathon Oil. So you may wish to see this free collection of other companies that have grown earnings strongly.

Marathon Oil is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.