Marathon Oil (NYSE:MRO) has had a great run on the share market with its stock up by a significant 10% over the last three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Marathon Oil’s ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Marathon Oil is:
18% = US$2.0b ÷ US$11b (Based on the trailing twelve months to June 2023).
The ‘return’ is the income the business earned over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.18 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Marathon Oil’s Earnings Growth And 18% ROE
At first glance, Marathon Oil seems to have a decent ROE. Be that as it may, the company’s ROE is still quite lower than the industry average of 28%. Still, we can see that Marathon Oil has seen a remarkable net income growth of 38% over the past five years. Therefore, there could be other causes behind this growth. Such as – high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.
Next, on comparing with the industry net income growth, we found that Marathon Oil’s growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. Is MRO fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is Marathon Oil Efficiently Re-investing Its Profits?
Marathon Oil’s three-year median payout ratio to shareholders is 6.2%, which is quite low. This implies that the company is retaining 94% of its profits. So it looks like Marathon Oil is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Marathon Oil has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 14% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company’s expected ROE (to 13%) over the same period.
Overall, we are quite pleased with Marathon Oil’s performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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.