Is Union Pacific Corporation (UNP) a Cash King? – Canadian National Railway (USA) (CNI), Norfolk Southern Corp. (NSC)

While Union Pacific Corporation (NYSE:UNP) has suffered along with many other businesses from a struggling economy, it has benefited from the high energy prices we’ve seen over the last few years, as many companies realize it’s cheaper to transport their goods via train. Along with Canadian National Railway (USA) (NYSE:CNI), Union Pacific has also managed to profit from the fact that there is insufficient pipeline coverage in areas like North Dakota, which produces a great deal of energy from the Bakken Shale and needs a way to ship it.

Also, unlike CSX and Norfolk Southern Corp. (NYSE:NSC), Union Pacific Corporation (NYSE:UNP) doesn’t rely heavily on coal shipping. This has sheltered it from some of the revenue losses seen by these other companies due to reduced demand for coal caused by a slowdown in Chinese manufacturing and the fact that many businesses are moving from coal to lower-priced alternatives like natural gas.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash — but that doesn’t necessarily make them poor investments. Conversely, the formula works better for slower-growing blue chips. You’ll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

The article Is Union Pacific a Cash King? originally appeared on Fool.com.

Jim Royal has no position in any stocks mentioned. The Motley Fool recommends Canadian National Railway and McDonald’s. The Motley Fool owns shares of McDonald’s.

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