Investors Met With Slowing Returns on Capital At Union Pacific (NYSE:UNP)

By
Simply Wall St
Published
September 21, 2021
NYSE:UNP
Source: Shutterstock

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. However, after briefly looking over the numbers, we don't think Union Pacific (NYSE:UNP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Union Pacific is:

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

0.15 = US$8.5b ÷ (US$62b - US$4.4b) (Based on the trailing twelve months to June 2021).

Therefore, Union Pacific has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Transportation industry.

See our latest analysis for Union Pacific

roce
NYSE:UNP Return on Capital Employed September 21st 2021

In the above chart we have measured Union Pacific'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 Union Pacific here for free.

The Trend Of ROCE

Things have been pretty stable at Union Pacific, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Union Pacific to be a multi-bagger going forward. This probably explains why Union Pacific is paying out 38% 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.

In Conclusion...

In a nutshell, Union Pacific has been trudging along with the same returns from the same amount of capital over the last five years. Yet to long term shareholders the stock has gifted them an incredible 134% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Union Pacific does have some risks though, and we've spotted 1 warning sign for Union Pacific that you might be interested in.

While Union Pacific 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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