Canadian National Railway (USA) (NYSE: CNI) easily outperformed the Industrials sector by 25.1% as it relates to ROE, producing a strong 35.2% compared to the sector’s 10.1%. But what is more interesting is whether Canadian National Railway will continue to achieve superior returns moving forward. The DuPont analysis is a useful tool that may help us determine this. In my analysis below, I’ll use the DuPont model to reveal what’s really driving the company’s strong ROE.
Canadian National Railway’s ROE Trends
Return on equity or ROE represents the percentage return a company generates on the money shareholders have invested.
ROE = Net Income To Common / Average Total Common Equity
In general, a higher return on equity suggests management is utilizing the capital invested by shareholders efficiently. However, it is important to note that ROE can be impacted by management’s financing decisions such as the deployment of leverage.
Canadian National Railway’s recent ROE trends are illustrated in the chart below.
source: finbox.io data explorer – ROE
It appears that the finbox.io data explorer – ROE of Canadian National Railway has generally been increasing over the last few years. ROE increased from 23.2% to 24.0% in fiscal year 2016, increased to 35.2% in 2017 and the LTM period is also its latest fiscal year. So what’s causing the general improvement?
What’s Causing Canadian National Railway’s Improving Return On Equity
A less used approach although being much more intuitive, the DuPont formula is another way to calculate a company’s ROE. It is defined as:
ROE = Net Profit Margin * Asset Turnover * Equity Multiplier
Created by the DuPont Corporation in the 1920s, the analysis is a useful tool that helps determine what’s responsible for changes in a company’s ROE. It highlights that a firm’s ROE is affected by three things: profit margin, asset turnover, and its equity multiplier or financial leverage.