Yahoo Finance Murphy Oil Corporation’s (NYSE:MUR) Investment Returns Are Lagging Its Industry
Today we'll evaluate Murphy Oil Corporation (NYSE:MUR) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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'.
How Do You Calculate Return On Capital Employed?
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 Murphy Oil:
0.065 = US$661m ÷ (US$11b - US$846m) (Based on the trailing twelve months to December 2018.)
So, Murphy Oil has an ROCE of 6.5%.
Check out our latest analysis for Murphy Oil
Does Murphy Oil Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Murphy Oil's ROCE appears to be significantly below the 9.3% average in the Oil and Gas industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Murphy Oil stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Murphy Oil has an ROCE of 6.5%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
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, after all, simply a snap shot of a single year. We note Murphy Oil could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for Murphy Oil.
What Are Current Liabilities, And How Do They Affect Murphy Oil's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Murphy Oil has total liabilities of US$846m and total assets of US$11b. Therefore its current liabilities are equivalent to approximately 7.7% of its total assets. With low levels of current liabilities, at least Murphy Oil's mediocre ROCE is not unduly boosted.
Our Take On Murphy Oil's ROCE
Based on this information, Murphy Oil appears to be a mediocre business. But note: Murphy Oil may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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. Thank you for reading.
