The accounting equation as a comparison tool?

So, what's my goal for this? I want to see what we can learn from looking at the accounting equation for Union Pacific, see what we can lean about the business (purely from looking at that) but then seeing what we can learn from comparing it to a competitor (Canadian Pacific Kansas City Limited).

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To begin with, what's the accounting equation?

The accounting equation, fundamental to financial analysis, is expressed as:

Assets = Liabilities + Shareholders' Equity

This equation ensures that a company's balance sheet remains balanced, reflecting that all assets are financed either through debt (liabilities) or through the owners' investments (equity).

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Let's look at Union Pacific Corporation

Assets: The reduction in operating expenses, particularly in fuel costs, likely contributed to an increase in net assets, as retained earnings (a component of shareholders' equity) grew due to higher net income.

In the fourth quarter, Union Pacific reported a net income of $1.76 billion, or $2.91 per share, up from $1.65 billion, or $2.71 per share, in the same period the previous year. This increase is attributed to improved fuel efficiency and lower diesel prices, despite a slight decline in revenue from $6.16 billion to $6.12 billion.

Liabilities: While specific changes in liabilities were not detailed in the available sources, the company's improved profitability could influence its debt management strategies, potentially leading to debt reduction or restructuring.

Shareholders' Equity: The rise in net income enhances retained earnings, thereby increasing shareholders' equity. This shift indicates a strengthening financial position, as a larger portion of the company's assets is financed through equity rather than debt.

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How does it compare?

Total Assets

• CPKC has higher total assets (~90,000) compared to UP (~70,000).

• This suggests that CPKC has a larger asset base, which may be due to recent acquisitions, infrastructure expansion, or investments.

• CPKC recently merged with Kansas City Southern, forming the first fully integrated Canada-U.S.-Mexico rail network, which likely increased its asset base significantly.

Total Liabilities

• UP has significantly higher liabilities (~50,000) compared to CPKC (~35,000).

• This suggests that UP is more leveraged, meaning it finances a larger portion of its assets with debt.

• Higher liabilities could indicate greater debt obligations, possibly from capital expenditures, financing expansions, or long-term operational investments.

Equity

• CPKC has significantly higher equity (~40,000) compared to UP (~15,000).

• This indicates that CPKC finances more of its operations through shareholders' equity rather than debt.

• CPKC’s recent expansion and strong financial performance may have increased its retained earnings and investor confidence.

• UP, on the other hand, relies more on debt financing, as seen by the higher liabilities-to-equity ratio. This could increase financial risk but also improve return on equity if managed well.