Canadian National Railway (TSE:CNR) Hasn't Managed To Accelerate Its Returns

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Canadian National Railway's (TSE:CNR) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.18 = CA$8.3b ÷ (CA$51b - CA$4.6b) (Based on the trailing twelve months to March 2023).

So, Canadian National Railway has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 13% generated by the Transportation industry.

View 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 employed 35% more capital in the last five years, and the returns on that capital have remained stable at 18%. Since 18% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Canadian National Railway's ROCE

The main thing to remember is that Canadian National Railway has proven its ability to continually reinvest at respectable rates of return. Therefore it's no surprise that shareholders have earned a respectable 51% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know about the risks facing Canadian National Railway, we've discovered 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.