Well, it's somewhat near the end of September which means I have my online version of the November issue of Trains.
This issue contains a very good (IMHO) article written by Bill Stephens titled "The Cult of the Operating Ratio." It evenly discusses the adverse effects of an undue focus on the OR and presents several alternatives as more suiting financial performance measurements. It has input from current and former railroad officials, financial analysts, and economists.
It does point out that BNSF is a non-participant in the Operating Ratio Cult.
It's a good and informative article. My only nit pick is that many readers won't understand the difference between "Return On Invested Capital" and "Return On Capital Employed" or "Return On Assets". A side bar explaining them and their importance probably would have helped.
Ken - How about if you write that here right quick ?
Otherwise, I'm looking forward to the print version of the article.
Does it help with figuring out how to make money from the bubbleheads who are OCD about the OR ?
- PDN.
Paul_D_North_JrKen - How about if you write that here right quick ?
I'll provide links. Frankly, I had to check them myself.
Return on invested capital:
http://www.investinganswers.com/financial-dictionary/ratio-analysis/return-invested-capital-roic-1188
Return on assets:
http://accountingexplained.com/financial/ratios/return-on-assets
Return on capital employed:
http://accountingexplained.com/financial/ratios/return-on-capital-employed
None of these is a perfect measure. They need to be considered in context and understood. There is no perfect measure. But, in context, they sure are better than having OCD about the OR. As to how to make money from the OCD types, see what the BNSF is doing vs the UP.
Another measure, which is somewhat discussed and explained in the article, is "Net Present Value of Free Cash Flows." The author explains "Free Cash Flows" (money left after bills paid, maintenance and expansion paid, and dividends paid) but doesn't explain "Net Present Value".
NPV:
http://www.accountingformanagement.org/net-present-value-method/
An analyst claims that the NPV measure is all inclusive measuring revenue growth, pricing, operating efficiency and capital intensity.
The problem with the NPV measure is that it uses projected future cash comming in and out. So it's not really a measure of what happened but a measure of what is projected to happen.
I can understand why Trains didn't document these definitions. They're kind of complex and lengthy.
On a related note, I wonder how many businesses have an idea of what their true costs are in terms of expenses and lost revenues. In the case of railroads, chasing the lowest OR may involve forgoing a lot of revenue, which in turns would lower the return on investment (this sounds like the gist of the article, which I am looking forward to reading when the next issue shows up in the mail).
I don't want to get too boorish about this article, but...
It is the most informative and exciting writing I've read about railroads since "American Railroads -- Decline and Renaissance in the 20th Century" by Gallamore and Meyer.
Do you want to know what guides the BNSF in terms of financial numbers? It's included and straight from Matt Rose. (It's not the operating ratio, but they don't ignore the OR)
Do you want to know just what E. Hunter Harrison thinks of the profitability of shorter haul intermodal. It's included and straight from Mr. Harrison. (It's profitable IF the OR is low enough.)
This is freaking great to read!
If Greyhound is excited about an article, then I cannot wait to read it. Perhaps the printed issue will arrive this weekend.
There are a number of tools available to measure the value of a company and probably a few which apply to railroads which are seldom used outside of transportation. One usually must use several of these ratios/calculations to form a true picture.
OR is quick and handy, sort of like current ratio to measure the balance sheet. Both provide a current snapshot of their "home", if you will.
Railroads use an enormous amount of capital. It takes enormous investment to purchase land, lay track, acquire locomotives, rolling stock, technology, etc. Typically railroads return on capital (or other related forms of capital such as ROIC) will tend to be lower than other industries except for other capital intensive industries (oil exploration is one that comes to mind).
Measuring a company's ROE (return on equity) simply substracts the debt from the capital (actually more complex than that).
The use of free cash flow in my mind gives another tool. By looking at the cash flow statement, one can determine what the cash is being used for. A healthy FCF/revenue figure shows a company is not only re-investing but also able to return earnings back to the owners. How much is available after investment? Railroads have been generating healthy free cash flow the past 15 years.
Lots of things to consider and I am looking forward to the article.
ed
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