Canadian Pacific Kansas City Ltd. (CP) Cash Flow Statement

The OCF/NI ratio of 1.68 in 2026Q2 suggests strong cash generation relative to net income, but the prior quarter's 0.83 implies a temporary shortfall. This volatility likely stems from working capital swings and merger-related timing differences, not core operational deterioration. Investors should monitor whether cash conversion stabilizes as integration progresses.

The sequential improvement in FCF margin is encouraging, but the level is still roughly half of pre-merger peaks. This suggests that while cash generation is recovering, the full benefits of the Kansas City Southern acquisition have not yet materialized. The gap between net income and FCF, driven by elevated capex, warrants close attention.

The sustained high capex-to-revenue ratio suggests CP is investing heavily in capacity and integration, likely to capture synergies from the merger. However, this capital intensity pressures near-term FCF, and investors should assess whether these investments yield the expected efficiency gains. The depreciation charge of roughly $500M per quarter aligns with the elevated asset base.

The volatility in working capital is a red flag for smooth cash conversion. The negative change in Q1 suggests a cash outflow, while Q2's positive change indicates a release, but the pattern is inconsistent. This may reflect integration challenges in harmonizing billing and payment cycles across the combined entity. Stable working capital is essential for predictable cash flow.

The buyback pace is aggressive, especially given the ongoing integration and elevated capex. In 2026Q2, buybacks exceeded FCF by $340M, implying the company is using balance sheet cash or debt to fund repurchases. This could be a deliberate strategy to offset dilution, but it reduces financial flexibility. Investors should monitor whether buybacks are sustainable without compromising investment needs.

The cumulative OCF/NI ratio of 1.34 suggests that CP's earnings are well-backed by cash, with non-cash charges like D&A contributing to the divergence. However, the recent acquisition-related swings in working capital and capex could alter this trend. The sustained cash generation supports the company's ability to fund dividends and buybacks, but the pace of capital returns may need to moderate.