Returns On Capital At Norfolk Southern (NYSE:NSC) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Norfolk Southern (NYSE:NSC), so let's see why.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Norfolk Southern is:

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

0.092 = US$3.6b ÷ (US$42b - US$3.4b) (Based on the trailing twelve months to March 2024).

Therefore, Norfolk Southern has an ROCE of 9.2%. On its own that's a low return, but compared to the average of 7.5% generated by the Transportation industry, it's much better.

Check out 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 for free.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Norfolk Southern, given the returns are trending downwards. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Norfolk Southern becoming one if things continue as they have.

Our Take On Norfolk Southern's ROCE

In summary, it's unfortunate that Norfolk Southern is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 32% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing Norfolk Southern we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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.