Returns On Capital Are A Standout For Marathon Oil (NYSE:MRO)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of Marathon Oil (NYSE:MRO) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Marathon Oil is:

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

0.23 = US$3.5b ÷ (US$18b - US$2.4b) (Based on the trailing twelve months to September 2022).

So, Marathon Oil has an ROCE of 23%. In absolute terms that's a very respectable return and compared to the Oil and Gas industry average of 21% it's pretty much on par.

See our latest analysis for Marathon Oil

Above you can see how the current ROCE for Marathon Oil compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Marathon Oil.

How Are Returns Trending?

We're delighted to see that Marathon Oil is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 23% on their capital employed. Additionally, the business is utilizing 27% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Marathon Oil could be selling under-performing assets since the ROCE is improving.

What We Can Learn From Marathon Oil's ROCE

In a nutshell, we're pleased to see that Marathon Oil has been able to generate higher returns from less capital. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 67% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know more about Marathon Oil, we've spotted 2 warning signs, and 1 of them can't be ignored.

Marathon Oil is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.