Union Pacific Corp. (NYSE:UNP)

The period under review demonstrates a consistent pattern of negative economic profit, despite fluctuations in underlying financial components. Net operating profit after taxes (NOPAT) initially increased before declining, while the cost of capital generally trended upward. Invested capital exhibited a steady increase throughout the period. These factors combined to produce economic profit figures that remained below zero for all years examined.

NOPAT Trend

Net operating profit after taxes increased from US$6,650 million in 2020 to US$7,625 million in 2021, representing a growth of approximately 14.5%. This was followed by a further increase to US$8,288 million in 2022. However, NOPAT then decreased to US$7,558 million in 2023 and showed a modest recovery to US$7,772 million in 2024. The decline from 2022 to 2023 suggests potential pressures on operational profitability.

Cost of Capital Trend

The cost of capital experienced a gradual increase over the five-year period. Starting at 15.72% in 2020, it rose to 15.88% in 2021 and 15.79% in 2022. A more pronounced increase was observed in 2023, reaching 16.13%, and continued into 2024, reaching 16.28%. This upward trend indicates increasing financing costs, potentially due to broader macroeconomic conditions or changes in the company’s capital structure.

Invested Capital Trend

Invested capital demonstrated a consistent upward trend throughout the period. It began at US$58,340 million in 2020 and increased to US$58,241 million in 2021, a slight decrease. Subsequent years saw continued growth, reaching US$59,751 million in 2022, US$61,524 million in 2023, and US$62,044 million in 2024. This suggests ongoing investment in the business, potentially for expansion or modernization.

Economic Profit

Economic profit remained negative throughout the entire period. The figures were -US$2,524 million in 2020, -US$1,625 million in 2021, -US$1,148 million in 2022, -US$2,368 million in 2023, and -US$2,331 million in 2024. While the negative economic profit lessened from 2020 to 2022, it increased again in 2023 and remained substantial in 2024. This indicates that the company’s returns are not exceeding its cost of capital, despite growth in NOPAT and invested capital.

The combination of a rising cost of capital and increasing invested capital, coupled with fluctuations in NOPAT, consistently resulted in negative economic profit. While NOPAT showed initial improvement, it was insufficient to offset the increasing cost of funding the growing invested capital base.

Net Income

Net income exhibited a generally upward trend over the five-year period, starting at 5,349 million US dollars in 2020 and increasing to 6,747 million US dollars in 2024. The most significant increase occurred between 2020 and 2021, with an approximate rise of 1,174 million US dollars. Following this, growth continued but at a slower pace, with a slight dip observed in 2023 where net income decreased to 6,379 million US dollars from the previous year's 6,998 million. However, net income recovered in 2024, reaching 6,747 million US dollars, indicating resilience after the decline.

Net Operating Profit After Taxes (NOPAT)

NOPAT demonstrated a consistent growth pattern from 2020 to 2022, rising from 6,650 million US dollars to 8,288 million US dollars. This growth trend aligns with the net income increases during the same period. In 2023, NOPAT declined to 7,558 million US dollars, mirroring the reduction observed in net income, and then increased slightly to 7,772 million US dollars in 2024. Despite the drop in 2023, the overall trajectory over the five years remains positive, with a total increase of 1,122 million US dollars from 2020 to 2024.

Comparative Insights

Both net income and NOPAT experienced growth from 2020 through 2022, followed by a decline in 2023 and a partial recovery in 2024. The decline in 2023 in both metrics suggests operational or market challenges during that year, while the recovery in 2024 indicates an improvement in conditions or performance. The proportional differences between net income and NOPAT values suggest effective management of taxes and operating expenses over the years, with NOPAT consistently exceeding net income, reflecting the inclusion of operating-related adjustments in its calculation. Overall, the data suggest a relatively stable profitability profile with some fluctuation centered around 2023, but an overall positive trend across the observed periods.

Income Tax Expense

The income tax expense demonstrated an overall increasing trend over the five-year period, rising from 1,631 million US dollars in 2020 to 2,047 million US dollars in 2024. There was a consistent increase from 2020 through 2022, peaking at 2,074 million US dollars in 2022. However, in 2023, a decline to 1,854 million US dollars was observed before increasing again in 2024.

Cash Operating Taxes

Cash operating taxes also exhibited an upward trajectory over the period under review, starting at 1,543 million US dollars in 2020 and reaching 2,285 million US dollars by 2024. The values rose steadily each year, except for a slight dip in 2023 to 2,020 million US dollars, followed by a recovery in 2024 to the highest level recorded.

Comparative Observations

Both income tax expense and cash operating taxes followed similar trends, including a noticeable decline in 2023 before increasing again in 2024. Cash operating taxes consistently exceeded income tax expense across all years, indicating higher actual tax outflows relative to the recorded income tax expense. The data suggest some volatility in tax-related cash flows in 2023, which may warrant further examination to understand drivers such as changes in tax payments or accounting treatments during that period.

The financial data exhibits several notable trends in debt, equity, and invested capital over the five-year period.

Total Reported Debt & Leases

This item showed a steady increase from 28,333 million US dollars at the end of 2020, peaking at 34,957 million in 2022. Subsequently, there is a declining trend in the following years, with debt and leases reducing to 32,463 million by the end of 2024. This pattern suggests an initial phase of increased leverage followed by a strategic reduction in debt levels.

Common Shareholders' Equity

The equity value demonstrates a declining trend from 16,958 million in 2020 to 12,163 million in 2022, indicating a reduction in shareholders' equity through those years. However, this trend reverses post-2022, with equity rising to 16,890 million by the end of 2024. The recovery in equity after 2022 points to improved retained earnings, capital injections, or other equity-enhancing actions.

Invested Capital

Invested capital remains relatively stable across the period, fluctuating within a range from approximately 58,241 million to 62,044 million. A slight upward trajectory is observable, with the figure reaching its highest point in 2024. This stability, combined with minor growth, implies consistent investment in operational or capital assets without significant expansion or contraction.

Overall, the data reflects a phase of increased leverage and declining equity until 2022, followed by a period of deleveraging and equity restoration. Invested capital maintained relative steadiness with slight growth, suggesting ongoing investment continuity. These dynamics may signal a strategic financial repositioning focused on balancing debt reduction with equity strengthening while sustaining capital investment levels.

The period under review demonstrates a consistent pattern of negative economic profit, alongside increasing invested capital. This has resulted in a fluctuating, but generally improving, negative economic spread ratio.

Economic Profit

Economic profit exhibits volatility throughout the period. Starting at a loss of US$2,524 million in 2020, it improved to a loss of US$1,625 million in 2021 and further to US$1,148 million in 2022. However, economic profit deteriorated in both 2023 and 2024, reaching losses of US$2,368 million and US$2,331 million respectively. This suggests increasing challenges in generating returns exceeding the cost of capital in the latter years.

Invested Capital

Invested capital shows a consistent upward trend over the five-year period. Beginning at US$58,340 million in 2020, it increased to US$58,241 million in 2021, then continued to rise to US$59,751 million in 2022, US$61,524 million in 2023, and finally reaching US$62,044 million in 2024. This indicates ongoing investment in the business, despite the negative economic profit.

Economic Spread Ratio

The economic spread ratio, consistently negative, reflects that the company’s returns on invested capital are less than its cost of capital. The ratio improved from -4.33% in 2020 to -2.79% in 2021 and -1.92% in 2022, indicating a narrowing gap between returns and cost of capital. However, the ratio worsened to -3.85% in 2023 and remained at -3.76% in 2024, suggesting a renewed widening of this gap. While the ratio shows some improvement over the initial years, the recent trend indicates a potential weakening in value creation.

In summary, while invested capital has been increasing, the company has not been able to generate sufficient economic profit to offset the cost of that capital. The economic spread ratio, though showing some initial improvement, has recently stabilized at a negative level, indicating continued challenges in achieving positive economic value added.

The economic profit margin exhibited a fluctuating, yet generally negative, trend over the five-year period. While showing some improvement between 2020 and 2022, the metric deteriorated in the subsequent two years, remaining consistently negative throughout the observed timeframe.

Economic Profit Margin

The economic profit margin began at -12.92% in 2020. A notable improvement was observed in 2021, with the margin increasing to -7.45%. This positive trend continued into 2022, reaching -4.62%, representing the least negative value within the period. However, the margin then experienced a reversal, declining to -9.82% in 2023 and further to -9.61% in 2024. This indicates a weakening in the generation of economic profit relative to operating revenues in the latter part of the period.

Economic profit itself consistently remained negative across all five years. The magnitude of the negative economic profit decreased from US$2,524 million in 2020 to US$1,625 million in 2021, and then to US$1,148 million in 2022. However, it increased again in 2023 to US$2,368 million and remained high in 2024 at US$2,331 million. This suggests that while revenue increased, the cost of capital consistently exceeded returns generated from operations.

Operating Revenues

Operating revenues demonstrated an overall upward trend, increasing from US$19,533 million in 2020 to US$21,804 million in 2021, and reaching a peak of US$24,875 million in 2022. A slight decrease was noted in 2023, with revenues falling to US$24,119 million, followed by a modest increase to US$24,250 million in 2024. Despite the revenue growth, the persistent negative economic profit margin suggests that revenue increases were insufficient to offset the cost of capital.

The combination of increasing revenues and consistently negative economic profit, coupled with a deteriorating economic profit margin in the most recent two years, warrants further investigation into the factors driving the cost of capital and operational efficiency.