Norfolk Southern (NYSE:NSC) Hasn't Managed To Accelerate Its Returns

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Norfolk Southern (NYSE:NSC) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Norfolk Southern, this is the formula:

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

0.13 = US$4.7b ÷ (US$39b - US$3.0b) (Based on the trailing twelve months to June 2023).

So, Norfolk Southern has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Transportation industry.

See our latest analysis for Norfolk Southern

In the above chart we have measured Norfolk Southern's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Norfolk Southern here for free.

So How Is Norfolk Southern's ROCE Trending?

Over the past five years, Norfolk Southern's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So don't be surprised if Norfolk Southern doesn't end up being a multi-bagger in a few years time. This probably explains why Norfolk Southern is paying out 39% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.

Our Take On Norfolk Southern's ROCE

We can conclude that in regards to Norfolk Southern's returns on capital employed and the trends, there isn't much change to report on. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Norfolk Southern that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.