ANALYSIS

Canadian National Railways Financial Analysis

Financial Analysis

Canadian National Railways Financial Ratios

Debt Ratio = Total Debt / Total Assets

2011

2010

2009

2008

2007

Total Debt

15.53

13.52

12.27

15.26

12.43

Total Assets

26.34

24.48

22.16

25.22

21.96

Debt Ratio

0.5896

0.55229

0.5537

0.60508

0.56603

Analysis of Debt Ratio: Debt Ratio shows how much a company is using debt financing to run the operations of the company. There are many reasons as to why companies prefer to choose debt over equity for their capital structure. Debt provides a tax shield as interest payments help lower the tax of a company. For this company, the Debt Ratio has been hovering between 55% and 60% throughout the last 5 years. We can safely conclude that this company has been utilizing a relatively stable capital structure for its financing requirements.

Debt to Equity Ratio = Total Debt / Total Equity

2011

2010

2009

2008

2007

Total Debt

15.53

13.52

12.27

15.26

12.43

Total Equity

10.81

10.96

9.888

9.968

9.526

Debt to Equity Ratio

1.43663

1.23358

1.2409

1.5309

1.30485

Analysis of Debt to Equity Ratio: Debt to Equity ratio shows the ratio of debt employed by the company with the equity raised by the company. There are many reasons why companies may chose to raise equity instead of debt. Equity allows companies to raise a significantly large amount of money. For example there have been Initial Public Offerings (IPOs) that have raised in excess of US $15 Billion. For Canadian National Railways, the Debt financing has always exceeded Equity Financing throughout the last five years. The debt to equity ratio has hovered between 1.25 and 1.53 during these past five years, implying that the company's capital structuring has been relatively stable.

Equity Multiplier = Total Assets / Total Equity

2011

2010

2009

2008

2007

Total Assets

26.34

24.48

22.16

25.22

21.96

Total Equity

10.81

10.96

9.888

9.968

9.526

Equity Multipliers

2.43663

2.23358

2.2411

2.5301

2.30527

Analysis of Equity Multiplier: Equity Multiplier shows the ratio of the total assets with the total stock holder's equity. A higher number indicates that the company is more inclined towards debt financing than equity financing. Throughout the last 5 years, this ratio has hovered between 2.23 and 2.53 hence the ratio of debt and equity financing has been relatively stable.

Degree of Financial Leverage (DFL) = % Change in EPS / % Change in EBIT

2011

2010

2009

2008

2007

EBIT

3.336

2.936

2.118

2.732

2.692

Change in EBIT

13.6%

38.6%

-22.5%

1.49%

EPS

5.4

4.48

3.72

3.46

4.03

Change in EPS

20.54%

20.43%

7.51%

-14.1%

DFL

1.50732

0.52898

-0.3344

-9.5189

Degree of Financial Leverage Analysis: Earnings per Share (EPS) show the amount of net income the company earned for each of its common stock. Earnings before Interest and Tax (EBIT) show the amount the company was able to earn before the deductions of interest payments and taxes. Earnings before interest and tax is a better indicator of the company's performance as both Interest payments and taxes are amounts which the management has no control over. This ratio shows the volatility of the earnings per share based on the levels of the company's EBIT. In most cases, companies that are trying to maximize their EPS will try to use this ratio as a guiding tool to help them determine the most appropriate and effective level of financial leveraging. For the past two years, this ratio has gone from 0.52 to 1.5 showing that the company is able to balance its financial leverage to achieving a high EPS number.

Canadian National Railways Debt Structuring

A large portion of the debt that is being used by Canadian National Railways is being financed ...