We all know how the railroad made it or crumbled back then; but now, what make their pocket green?
After deregulation and other factors came into play, mergers fell into place, what now make the railroads their profit and what do they consider making a profit?
Junction,
A railroad is like any other business, you sell enough or something at enough of a margin to cover your overhead and leave something fot the owner.
Railroads sell transportation, predominately low cost low value transportation at that. Truckers produce about the same volume of transportation, in net ton miles, but their revenue is 10 times that of the railroad industry’s which speaks volumes about the value of railroad service as seen in the marketplace.
A primer on railroad accounting. Revenue is what you get paid for what you do. Operating cost is the cost of doing business, except the cost of borrowed money. The ratio of operating cost to revenue is the operating ratio. Most railroads are happy to have it in the 70s. An OR of 75 means you carry 25% forward to cover your fixed costs. Fixed costs are dominated by interest paid on debt. This is a substantial cost for most railroads, If there is any income, income taxes are deducted and the balance is after tax net income. That is what you can pay dividends to your shareholders from.
Of course there are two major items on the cash flow statement depreciation and capital investments. If business is growing capital investment will oftern exceed depreciation so you have to borrow more money but this does not show on income statement.
One of the industry’s major problems is that it takes about $3 of investment to generate $1 of gross income. That means the your 25% margin (or $.25) has to pay interest on $3. A key indicator of financial health is “coverage ratio” which is the number of times that Operating Income (berore taxes) covers interest. The bond rating agencie, Moodys and Standard and Poors, like to see three or more. If less than 1 you can not pay your current interest from current income which is a bad thing. If this goes on too long you are bankrupt.
Mac
Mac
That is one of the best descriptions in so short a space on this subject I have ever seen!!
Good Job!
What kind of costs are considered part of the operations? What are the other costs involved?
Very good e
Junction,
Go to any American Railroad’s web site. I like the BNSF presentation but thery are all pretty much alike, and the 10K Forms are identical since form is prescribed by SEC… You can find financial statements under the “investors” tab.
Operating costs are everything except interest. More Specifically and without attempting to name all accounts
Transportation
Fuel
On train Labor
Yard Labor
Taxes on Labor
Car hire
Loss and Damage
Clearing wrecks
Depreciation
Maintenace of Equipment
Parts purchased
Labor
Taxes on Labor
Depreciation
Maintenance of Way
Materials purchased and installed
Labor
Taxes on Labor
Depreciation
Geneal and Administrative
Labor of President and executive staff
Labor for Marketing
Labor to operate your computer center
Labor of HQ clerical forces
Cost of Lawers both on staff and outside
Power bill for HQ
I can not remember where equipment leases go, Transportation probably.
In short the costs of everything you do to run the train and maintain the track and equipment are operating expenses.
The operating expenses are identified on the Income Statement.
The balance sheet is very important because it shows the assets and liabilities. Assets may be liquid or illiquid. Ca***he the ultimate liquid asset. Marketable securites are next most liquid. Equipment is less liquid, Investment in fixed plant, such as rail, ties, ballast, bridges, roadbed, and land is illiquid which is a two dollar word for toughtto sell quickly.
The Cash flow statement helps you figure out changes to the ballance sheet.
Basic accounting says debits and credits have to match. Debits are entries on the left of a two column account and credits are to the right. Increases to assets and expenses are debits.
Thankyou for the detailed information; this definately helps me understand more what the railroads go through.