Should You Be Worried About Marathon Petroleum Corporation (NYSE: MPC) ROE?

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<p class = "Canvas-Atom-Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Some investors are already familiar with financial figures from this This article is intended for those who want to learn more about Return On Equity (ROE) and what it means, and to get the practical background, we use the return on investment to better understand Marathon Petroleum Corporation.NYSE: MPC). "data-reactid =" 27 "> While some investors are already familiar with key financial figures (top hat), this article is aimed at those who want to learn more about the return on equity (ROE) and its importance. Keep the lesson well-founded in practice. We will use the ROE to better understand Marathon Petroleum Corporation (NYSE: MPC).

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Marathon Petroleum has an ROE of 9.6%, based on the past twelve months. This means that for every $ 1 of equity worth, $ 0.10 was earned. "Data reactid =" 28 ">Marathon Petroleum has an ROE of 9.6%, based on the past twelve months. This means that for every $ 1 of equity worth, $ 0.10 was earned.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for Marathon Petroleum "data-reactid =" 29 "> Check out our latest analysis for Marathon Petroleum

How do I calculate return on equity?

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The Formula for ROE is: "data-reactid =" 31 "> The Formula for ROE is:

Return on equity = net income (from continuing operations) ÷ equity

Or for marathon petroleum:

9.6% = $ 4.2 billion ÷ $ 44 billion (based on the past twelve months to September 2019)

Most readers would understand what net profit is, but it's worth explaining the concept of equity. These are all the profits retained by the company plus the capital paid in by the shareholders. You can calculate equity by subtracting the company's total liabilities from total assets.

What does return on equity mean?

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "ROE considers the amount a company earns in relation to the money it kept in business. The "return" is the profit in the past 12 months. That is, the higher the ROE, the more profitable the company is. So, usually, A high ROE is a good thing, This means that two companies can be compared with ROE. "Data-reactid =" 37 "> ROE shows how much a company makes in relation to the money it has kept in the company. The return is the profit of the last twelve. That means, the higher the ROE, the more profitable the enterprise. A high ROE is a good thing, This means that two companies can be compared with ROE.

Does Marathon Petroleum have a good return on equity?

An easy way to determine if a company has a good return on equity is to compare it to the industry average. The limitation of this approach is that some companies also differ significantly from others within the same industry classification. As can be seen in the following picture, Marathon Petroleum has a lower ROE than the average (12%) in the oil and gas industry.

NYSE: MPC Past Revenue and Net Income, January 4, 2020

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "This is certainly not ideal. We prefer it if the ROE a company is above the industry average, but it is not the most important thing if it is lower Check again if insiders have recently sold stocks, "data-reactid =" 52 "> It is certainly not ideal. We prefer a company's ROE to be above the industry average, but it is not the most important thing if it is lower. It could be useful Check again if insiders have recently sold stocks,

How does debt affect ROE?

Most companies need money from somewhere to increase their profits. The money for investments can come from the previous year's profit (retained earnings), the issue of new shares or the taking out of loans. In the first and second options, the ROE reflects this use of cash for growth. In the latter case, the debt required for growth will increase returns, but will not affect equity. In this way, the use of debt will increase return on investment, although the core economy of the business remains unchanged.

Marathon Petroleum's debt and ROE of 9.6%

Marathon Petroleum has a debt ratio of 0.64, which is by no means excessive. I'm not impressed with the return, but the debt isn't too high, which suggests the company has good prospects. Using debt prudently to improve returns can certainly be a good thing, although this will increase the risk slightly and reduce future optionality.

In total

The return on equity is a useful indicator of a company's ability to make profits and return them to shareholders. In my book, the companies with the highest quality have a high return on equity despite the low level of debt. In general, if two companies have approximately the same leverage and one has a higher return, I would prefer the one with higher return.

<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "But if a company is of high quality, the market is Often bids up to a price that reflects this, and the rate at which earnings are likely to grow in relation to earnings growth expectations reflected in the current price must also be considered Visualization of analyst forecasts for the company, "data-reactid =" 63 "> But when a company is high quality, the market often offers it at a price that reflects it. The rate at which profits are likely to grow in relation to expectations of profit growth, which are reflected in The current price must also be taken into account, so you may want to check out this FREE visualization of analyst forecasts for the company.

<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "If you prefer to check out another company – one with potential superior finances – then don't miss thisfree List of interesting companies with high return on equity and low debt."data-reactid =" 64 "> If you'd rather try another company – one with potentially superior financial data – don't miss thisfree List of interesting companies with high return on equity and low debt.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 65 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.