Canadian National Railway (TSE:CNR) Has More To Do To Multiply In Value Going Forward

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over Canadian National Railway's (TSE:CNR) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Canadian National Railway:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = CA$6.5b ÷ (CA$49b - CA$3.1b) (Based on the trailing twelve months to December 2021).

So, Canadian National Railway has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Transportation industry.

See our latest analysis for Canadian National Railway

In the above chart we have measured Canadian National Railway's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 33% in that time. 14% is a pretty standard return, and it provides some comfort knowing that Canadian National Railway has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

To sum it up, Canadian National Railway has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 73% to shareholders over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

If you'd like to know about the risks facing Canadian National Railway, we've discovered 2 warning signs that you should be aware of.

While Canadian National Railway may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.