Investors Met With Slowing Returns on Capital At Norfolk Southern (NYSE:NSC)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Norfolk Southern (NYSE:NSC), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Norfolk Southern:

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

0.11 = US$4.3b ÷ (US$43b - US$3.7b) (Based on the trailing twelve months to June 2024).

Therefore, Norfolk Southern has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 9.1% it's much better.

See our latest analysis for Norfolk Southern

Above you can see how the current ROCE for Norfolk Southern compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Norfolk Southern .

What Can We Tell From Norfolk Southern's ROCE Trend?

There hasn't been much to report for Norfolk Southern's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Norfolk Southern to be a multi-bagger going forward. 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.

The Bottom Line 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. Although the market must be expecting these trends to improve because the stock has gained 62% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 3 warning signs we've spotted with Norfolk Southern (including 1 which is a bit unpleasant) .

While Norfolk Southern 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.