Advertisement
New Zealand markets closed
  • NZX 50

    11,671.19
    -96.21 (-0.82%)
     
  • NZD/USD

    0.6141
    -0.0004 (-0.07%)
     
  • ALL ORDS

    8,010.50
    -5.30 (-0.07%)
     
  • OIL

    81.28
    -0.29 (-0.36%)
     
  • GOLD

    2,345.50
    -1.40 (-0.06%)
     

Marathon Petroleum Corporation's (NYSE:MPC) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Marathon Petroleum's (NYSE:MPC) recent performance, when its stock has declined 10% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Marathon Petroleum's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Marathon Petroleum

How Do You Calculate Return On Equity?

The formula for return on equity is:

ADVERTISEMENT

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Marathon Petroleum is:

32% = US$9.4b ÷ US$30b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.32.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Marathon Petroleum's Earnings Growth And 32% ROE

First thing first, we like that Marathon Petroleum has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. Under the circumstances, Marathon Petroleum's considerable five year net income growth of 50% was to be expected.

As a next step, we compared Marathon Petroleum's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 38%.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is MPC worth today? The intrinsic value infographic in our free research report helps visualize whether MPC is currently mispriced by the market.

Is Marathon Petroleum Using Its Retained Earnings Effectively?

Marathon Petroleum has a really low three-year median payout ratio of 12%, meaning that it has the remaining 88% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Moreover, Marathon Petroleum is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 25% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 24% over the same period.

Summary

Overall, we are quite pleased with Marathon Petroleum's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.