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Determining a company's financial health is a very important step in making a decision on whether or not to invest or to stay invested. There are many different ways to compute a company's financial health. In the article below, I will be considering CSX Corporation's (NYSE:CSX) profitability, debt and capital, and operating efficiency. Based on this, we get to see sales, returns, margins, liabilities, assets, returns and turnovers.

All numbers sourced from Morningstar.

Profitability

Profitability is a class of financial metrics used to assess a business's ability to generate earnings compared with expenses and other relevant costs incurred during a specific period of time. In this section, we will look at four tests of profitability. They are: Net Income, Operating Cash Flow, Return on Assets, and Quality of Earnings. From these four metrics, we will establish if the company is making money, and gauge the quality of the reported profits.

  • Net Income 2010 = $1.563 billion.
  • Net Income 2011 = $1.822 billion.
  • Net Income 2012 TTM = $1.873 billion.

Over the past three years CSX's net profits have increased from $1.563 billion in 2010 to $1.873 billion in 2012 TTM. This signifies an increase of 19.83% in earnings over the past 3 years.

  • Operating Cash Flow 2010 = $3.071 billion.
  • Operating Cash Flow 2011 = $3.418 billion.
  • Operating Cash Flow 2012 TTM = $3.494 billion.

Operating Cash Flow is the cash generated from the operations of a company, generally defined as revenue less all operating expenses, but calculated through a series of adjustments to net income.

Over the past three years, the company's operating cash flow has also increased. The CSX's operating cash has increased by 13.77%.

ROA - Return On Assets = Net Income/Total Assets

ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."

  • Net income growth

    • Net Income 2010 = $1.563 billion.
    • Net Income 2011 = $1.822 billion.
    • Net Income 2012 TTM = $1.873 billion.
  • Total Asset growth

    • Total Assets 2010 = $28.141 billion.
    • Total Assets 2011 = $29.473 billion.
    • Total Assets 2012 TTM = $29.930 billion.
  • ROA - Return On Assets

    • Return On Assets 2010 = 5.55%.
    • Return On Assets 2011 = 6.18%.
    • Return On Assets 2012 TTM = 6.26%.

Over the past three years, CSX's ROA has increased from 5.55% in 2010 to 6.26% in 2012 TTM. This indicates that the company is making more money on its assets than it did in 2010.

Quality Of Earnings

Quality of Earnings is the amount of earnings attributable to higher sales or lower costs rather than artificial profits created by accounting anomalies such as inflation of inventory. To ensure there are no artificial profits being processed, the operating cash flow must exceed the net income.

2010

  • Operating Cash Flow 2010 = $3.071 billion.
  • Net Income 2010 = $1.563 billion.

2011

  • Operating Cash Flow 2011 = $3.418 billion.
  • Net Income 2011 = $1.822 billion.

2012 TTM

  • Operating Cash Flow 2012 TTM = $3.494 billion.
  • Net Income 2012 TTM = $1.873 billion.

Over the past three years, the operating cash flow has been higher than the net income. This indicates that the company is not artificially creating profits by accounting anomalies such as inflation of inventory.

Debt And Capital

The Debt and Capital section establishes if the company is sinking into debt or digging its way out. It will also determine if the company is growing organically or raising cash by selling off stock.

Total Liabilities To Total Assets, Or TL/A ratio

TL/A ratio is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt.

  • Total Assets

    • Total Assets 2010 = $28.141 billion.
    • Total Assets 2011 = $29.473 billion.
    • Total Assets 2012 TTM = $29.930 billion.
    • Equals an increase of 6.36%.
  • Total Liabilities

    • Total Liabilities 2010 = $19.455 billion.
    • Total Liabilities 2011 = $21.018 billion.
    • Total Liabilities 2012 TTM = $20.914 billion.
    • Equals a decrease of 7.50%.

Over the past three years, CSX has acquired more total liabilities than total assets. This indicates that the company has been financing its assets through debt. Over the past three years, the company's total assets increased by 6.36%, while the total liabilities increased by 7.50%.

Working Capital

Working Capital is a general and quick measure of liquidity of a firm. It represents the margin of safety or cushion available to the creditors. It is an index of the firm's financial stability. It is also an index of technical solvency and an index of the strength of working capital.

Current Ratio = Current Assets/Current liabilities

  • Current Assets

    • Current Assets 2010 = $2.855 billion.
    • Current Assets 2011 = $2.935 billion.
    • Current Assets 2012 TTM = $2.393 billion.
  • Current liabilities

    • Current liabilities 2010 = $2.537 billion.
    • Current liabilities 2011 = $2.687 billion.
    • Current liabilities 2012 TTM = $3.021 billion.
  • Current Ratio 2010 = 1.13.
  • Current Ratio 2011 = 1.09.
  • Current Ratio 2012 TTM = 0.79.

Over the past three years, CSX's current ratio has decreased from 1.13 in 2010 to 0.79 in 2012 TTM. This indicates that the company has less of the ability to pay off its short-term obligations than it did three years ago. As the most recent number is below 1, this indicates that the company would not be able to pay off its obligations if they came due at this point.

Shares Outstanding

  • 2010 Shares Outstanding = 1.09 billion.
  • 2011 Shares Outstanding = 1.04 billion.
  • 2012 Current Shares Outstanding = 1.03 billion (Google).

Over the past three years, the number of company shares has decreased. CSX Corporation's shares have decreased from 1.09 billion in 2010 to the current number of 1.03 billion. This is a decrease of 2.83%. This indicates that CSX is not issuing shares to raise money.

Operating Efficiency

Operating Efficiency is a market condition that exists when participants can execute transactions and receive services at a price that equates fairly to the actual costs required to provide them. An operationally efficient market allows investors to make transactions that move the market further toward the overall goal of prudent capital allocation without being chiseled down by excessive frictional costs, which would reduce the risk/reward profile of the transaction.

Gross Margin: Gross Income/Sales

The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that boasts a higher gross profit margin than its competitors and industry is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).

  • Gross Margin 2010 = $7.349 billion / $10.636 billion = 69.10%.
  • Gross Margin 2011 = $7.846 billion / $11.743 billion = 66.81%.
  • Gross Margin 2012 TTM = $7.952 billion / $11.823 billion = 67.26%.

Over the past three years, the gross margin has decreased. The ratio has decreased from 69.10% in 2010 to 67.26%. As the margin has decreased, this indicates the company has been less efficient in its distribution.

Asset Turnover

The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue. The numerator of the asset turnover ratio formula shows revenue found on a company's income statement and the denominator shows total assets, which are found on a company's balance sheet. Total assets should be averaged over the period of time that is being evaluated.

  • Revenue growth

    • Revenue 2010 = $10.636 billion.
    • Revenue 2011 = $11.743 billion.
    • Revenue 2012 TTM = $11.823 billion.
    • Equals an increase of 11.16%.
  • Total Asset growth

    • Total Assets 2010 = $28.141 billion.
    • Total Assets 2011 = $29.473 billion.
    • Total Assets 2012 TTM = $29.930 billion.
    • Equals an increase of 6.36%.

As the revenue growth has exceeded the asset growth, this implies that the company is making money on its assets.

Based on the nine different criteria above, Overall CSX Corporation is showing strong results. The company is showing weakness in its current ratio and its assets to liabilities. The working capital indicates that the company does not have the liquidity it did a couple of years ago while the TL&A ratio is indicating that CSX is using debt to pay for its assets. Having stated that the other margins are showing strength, and as the above ratios indicate, overall, CSX is showing strong results regarding its financial health.

Analysts at Bloomberg Businessweek are estimating CSX's revenues to increase over the next couple of years. They are estimating CSX's revenue to be at 12.0 billion for FY 2013 and 12.6 billion for 2014. They are estimating an increase in profitability as they are predicting CSX to have an EPS at $1.84 for FY 2013 and $2.07 for FY 2014.

Source: CSX: Inside The Numbers