Acquired by Berkshire Hathaway Inc. in 2010, Burlington Northern Santa Fe was primarily engaged in the freight rail transportation business.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On September 22, 1995, the stockholders of Burlington Northern Inc. ("BNI") and Santa Fe Pacific Corporation ("SFP") became the stockholders of BNSF pursuant to a business combination of the two companies which was approved at special meetings of their stockholders held on February 7, 1995. The business combination took place pursuant to the Agreement and Plan of Merger dated as of June 29, 1994 (as amended by amendments dated as of October 26, 1994, December 18, 1994, January 24, 1995, and September 19, 1995, the "Merger Agreement") which provided for BNI's acquisition of SFP. In accordance with the Merger Agreement, BNI and SFP conducted a joint tender offer in which SFP purchased 38 million shares and BNI purchased 25 million shares of SFP common stock at a price of $20 per share, the payment for which shares was made on February 21, 1995 (the "Tender Offer"). Between the Tender Offer and consummation of the business combination on September 22, 1995, SFP repurchased an additional approximate 3.6 million shares of SFP common stock, as permitted by the Merger Agreement. On September 22, 1995, pursuant to the Merger Agreement, (1) each outstanding share of BNI common stock (other than BNI common stock held by BNI as treasury stock or owned by SFP or BNI or any subsidiary of either of them) was converted into the right to receive one newly-issued share of BNSF common stock (par value $0.01 per share); (2) each outstanding share of SFP common stock (other than SFP common stock held by SFP as treasury stock or owned by SFP or BNI or any subsidiary of either of them) was converted into the right to receive 0.41143945 of a share of BNSF common stock; and (3) each outstanding share of BNI or SFP common stock then held as treasury stock or owned by BNI or SFP (other than shares of SFP common stock owned by BNI, which remain outstanding) was cancelled.
The boards of directors of Berkshire Hathaway Inc. (NYSE: BRK.A) (NYSE: BRK.B) and Burlington Northern Santa Fe Corporation (NYSE: BNI) today announced a definitive agreement for Berkshire Hathaway to acquire for $100 per share in cash and stock the remaining 77.4% of outstanding BNI shares not currently owned to increase its holdings to 100%. Based on the number of outstanding BNI shares (including shares currently owned by Berkshire) on Nov. 2, 2009, the transaction is valued at approximately $44 billion, including $10 billion of outstanding BNSF debt.