Capital Allocation Trends At Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Aren't Ideal

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Loma Negra Compañía Industrial Argentina Sociedad Anónima, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = AR$24b ÷ (AR$259b - AR$37b) (Based on the trailing twelve months to March 2023).

Thus, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

See our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima

Above you can see how the current ROCE for Loma Negra Compañía Industrial Argentina Sociedad Anónima compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Loma Negra Compañía Industrial Argentina Sociedad Anónima here for free.

SWOT Analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima

So How Is Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE Trending?

In terms of Loma Negra Compañía Industrial Argentina Sociedad Anónima's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 57% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Loma Negra Compañía Industrial Argentina Sociedad Anónima has done well to pay down its current liabilities to 14% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Loma Negra Compañía Industrial Argentina Sociedad Anónima. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing to note, we've identified 3 warning signs with Loma Negra Compañía Industrial Argentina Sociedad Anónima and understanding these should be part of your investment process.

While Loma Negra Compañía Industrial Argentina Sociedad Anónima may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.