Relationship between return on invested capital and market value of oil and gas companies

Abstract

Subject. The article addresses approaches and methods to calculate the rate of return (profitability) on invested capital of oil and gas companies based on financial statements, taking into account the stock market conditions. Objectives. The study aims at reconciliation (elimination of gaps) of market value indicators and financial indicators of oil and gas companies, using the economic value added model. Methods. We apply methods of forecasting, financial and factor analysis, and statistical methods on the basis of financial statements figures of the studied companies. Results. We analyzed the dynamics of profitability indicators and cost of invested capital for oil and gas companies in comparison with their market capitalization for 2015–2022, identified key factors influencing changes in ROIC, offered an adjusted approach to calculating the indicator, including the initial cost of invested capital. We tested the methodology and provided explanation of its practical significance, using the case of historical financial data and market capitalization of ExxonMobil. Conclusions. The study enabled to confirm the hypothesis that it is necessary to calculate the cost of fixed assets by the amount of total actual investments, net of accumulated revaluations to calculate the return on invested capital. In the numerator of the formula for this indicator, it is advisable to use profit before interest expenses, depreciation, income tax, and exploration, less investments to maintain current assets, and in the denominator – invested capital net of cash, current and non-current non-debt liabilities.