Marathon Petroleum (NYSE:MPC) Has A Somewhat Strained Balance Sheet
Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Marathon Petroleum Corporation (NYSE:MPC) does carry debt. But should shareholders be worried about its use of debt?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
You can click the graphic below for the historical numbers, but it shows that as of September 2025 Marathon Petroleum had US$32.2b of debt, an increase on US$27.7b, over one year. However, it also had US$2.65b in cash, and so its net debt is US$29.5b.
We can see from the most recent balance sheet that Marathon Petroleum had liabilities of US$18.7b falling due within a year, and liabilities of US$40.6b due beyond that. Offsetting these obligations, it had cash of US$2.65b as well as receivables valued at US$10.5b due within 12 months. So its liabilities total US$46.2b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its very significant market capitalization of US$52.7b, so it does suggest shareholders should keep an eye on Marathon Petroleum’s use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
View our latest analysis for Marathon Petroleum
We measure a company’s debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Marathon Petroleum has a debt to EBITDA ratio of 3.6 and its EBIT covered its interest expense 4.4 times. This suggests that while the debt levels are significant, we’d stop short of calling them problematic. Worse, Marathon Petroleum’s EBIT was down 28% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Marathon Petroleum can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Marathon Petroleum recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we’d usually expect. That positions it well to pay down debt if desirable to do so.
Mulling over Marathon Petroleum’s attempt at (not) growing its EBIT, we’re certainly not enthusiastic. But at least it’s pretty decent at converting EBIT to free cash flow; that’s encouraging. Once we consider all the factors above, together, it seems to us that Marathon Petroleum’s debt is making it a bit risky. Some people like that sort of risk, but we’re mindful of the potential pitfalls, so we’d probably prefer it carry less debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 2 warning signs for Marathon Petroleum you should be aware of.
At the end of the day, it’s often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It’s free.
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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.