FreightCar America’s (RAIL) Growing Returns on Capital: A Compelling Turnaround Story?

In the cyclical world of railcar manufacturing, where demand ebbs and flows with macroeconomic tides, FreightCar America (NASDAQ: RAIL) has emerged as a case study in resilience. The company’s second-quarter 2025 results—marked by a 15% gross margin expansion, a $3.8 million adjusted net income beat, and a $316.9 million backlog—have reignited investor interest. Yet, the numbers tell a paradox: while FreightCar’s Return on Invested Capital (ROIC) soared to 105.26%, its Return on Capital Employed (ROCE) plummeted to -83.65% [1]. This divergence raises critical questions about the sustainability of its turnaround and whether the company’s capital efficiency claims hold up under scrutiny.

Operational Improvements: A Foundation for Growth

FreightCar’s recent performance is underpinned by disciplined operational execution. The company’s gross margin expanded 250 basis points year-over-year to 15%, driven by optimized production processes and strategic pricing adjustments [2]. CEO Nick Randall credited “healthy customer demand” and “strong operational execution” for the results, despite a 20% decline in railcar deliveries compared to 2024 [3].

The backlog surge—now 3,624 units valued at $316.9 million—further signals pent-up demand. This positions FreightCar to capitalize on a sector grappling with delivery delays due to tariff uncertainties and supply chain bottlenecks. As one analyst noted, “The backlog is a testament to their ability to secure orders in a volatile environment” [4].

Capital Efficiency: A Tale of Two Metrics

The stark contrast between FreightCar’s ROIC and ROCE metrics demands closer examination. ROIC, which measures returns relative to invested capital, hit an eye-popping 105.26% in Q2 2025 [2]. By comparison, Greenbrier Companies (GBX), a peer in the railcar sector, reported a ROIC of 12.4% for the same period [5], while Titagarh Rail Systems (an international competitor) posted a ROIC of 5.33% [6]. FreightCar’s ROIC appears exceptional, even by industry standards.

However, the ROCE of -83.65% tells a different story. ROCE, which evaluates profitability relative to total capital employed (including debt and equity), suggests a company hemorrhaging value. This discrepancy likely stems from FreightCar’s capital structure: high leverage or non-operational assets could distort ROCE while ROIC remains inflated due to efficient reinvestment of equity. As a Bloomberg report notes, “ROCE paints a grimmer picture when debt servicing costs or asset write-downs are factored in” [1].

Industry Context: Cyclical Challenges and Strategic Shifts

The railcar manufacturing sector is navigating a period of strategic recalibration. Industry revenue is projected to reach $4.4 billion in 2025, with a five-year CAGR of 0.3% [7]. However, 2025 deliveries are expected to drop 20% year-over-year to 35,000 railcars, as companies delay investments amid trade policy uncertainty [8].

Despite these headwinds, innovation is reshaping the sector. Consolidation, automation, and production shifts to Mexico have improved efficiency. For example, Trinity Industries’ 14.6% Adjusted ROE in 2024 highlights the potential for disciplined capital allocation [9]. FreightCar’s recent $115 million term loan refinancing—reducing capital costs by 40%—aligns with this trend, freeing up $9.2 million annually for reinvestment [10].

A Turnaround Story? Weighing the Evidence

FreightCar’s Q2 results suggest a compelling narrative: operational improvements are translating into stronger margins and order growth. Yet, the negative ROCE raises red flags. For a turnaround to be sustainable, capital efficiency must align across metrics. The company’s ability to convert its $316.9 million backlog into cash flow will be critical.

Investors should also monitor broader industry trends. While intermodal traffic is rebounding—up 7.9% year-over-year in Q2 2024 [11]—manufacturing weakness and inflationary pressures remain risks. FreightCar’s success will depend on its capacity to maintain pricing discipline and navigate cyclical downturns without overleveraging.

Conclusion

FreightCar America’s turnaround story is a mixed bag. Operational improvements and a robust backlog underscore its competitive positioning, while the ROIC figure suggests exceptional capital efficiency. However, the negative ROCE and industry-wide delivery declines highlight structural challenges. For now, the company’s performance appears to hinge on its ability to balance aggressive reinvestment with prudent debt management. In a cyclical industry, consistency—not one-off results—will define long-term success.

Source:
[1] FreightCar America (STU:FAR) ROCE %, [https://www.gurufocus.com/term/roce/STU:FAR]
[2] FreightCar America, Inc. Reports Second Quarter 2025 Results, [https://investors.freightcaramerica.com/news-events/news/news-releases/2025/FreightCar-America-Inc--Reports-Second-Quarter-2025-Results/default.aspx]
[3] Efficiencies, demand aid Freightcar America earnings, [https://www.freightwaves.com/news/efficiencies-demand-aid-freightcar-america-earnings]
[4] FreightCar America, Inc. Reports Second Quarter 2025 Results, [https://finance.yahoo.com/news/freightcar-america-inc-reports-second-201500357.html]
[5] Earnings call transcript: Greenbrier Q2 2025 beats EPS ..., [https://www.investing.com/news/transcripts/earnings-call-transcript-greenbrier-q2-2025-beats-eps-forecast-stock-drops-93CH-3972395]
[6] Titagarh Rail Systems (BOM:532966) ROIC %, [https://www.gurufocus.com/term/ROIC/BOM:532966/ROIC-Percentage/Titagarh%20Wagons]
[7] Railcar Manufacturing in the US - Market Research Report, [https://www.ibisworld.com/united-states/industry/railcar-manufacturing/5510/]
[8] AAR sees 'uncertainty' for US railroads in 2025, [https://www.freightwaves.com/news/aar-sees-uncertainty-for-us-railroads-in-2025]
[9] Trinity Industries, Inc. Announces Fourth Quarter and Full Year 2024 Results, [https://www.trin.net/investor-relations/press-releases/news-details/2025/Trinity-Industries-Inc.-Announces-Fourth-Quarter-and-Full-Year-2024-Results/default.aspx]
[10] Why Freightcar America (RAIL) Is Skyrocketing So Far In 2025?, [https://finance.yahoo.com/news/why-freightcar-america-rail-skyrocketing-204537269.html]
[11] Intermodal market trends signal a return to stability, but warning signs lie ahead, [https://www.dcvelocity.com/intermodal-market-trends-signal-a-return-to-stability-but-warning-signs-lie-ahead-2669306782]