Does Loma Negra Compañía Industrial Argentina Sociedad Anónima's (NYSE:LOMA) PE Ratio Warrant A Sell?

The current price of LOMA places the company at a large trailing PE of 20.77x, which is 1.2 times more expensive than the 17.25x average multiple of the US Basic Materials. However, a static multiple such as PE is never conclusive on its own. This is because there are many company-specific factors like future prospects and capital structure, which are unaccounted for. Below, I will lay out some important considerations to help determine which multiple best suits LOMA’s growing business. Let's take a look below.

How much does LOMA earn?

PE is only used when a company is profitable, such as LOMA. This is because companies that are unprofitable or have recently become loss making cannot be valued using price-to-earnings since there are no earnings. For these companies, it is possible to compare price to other fundamentals like sales or book value where applicable. LOMA’s previous earnings record has continuously produced positive numbers. With upcoming earnings expected to remain positive, PE can be a valid multiple to apply to the company, but let’s see if there is a better alternative.

Does LOMA owe a lot of money?

Generally, debt should be below 40% of equity. Given that ’s debt-to-equity ratio is currently 90.31%, there’s room for improvement. This ratio indicates that for every $1 you invest, the company owes $0.90 to debtors. This means that if the company were to go bankrupt, equity investors have a lower claim on assets than debt providers that is owed the lion’s share of assets.

You may be wondering how debt impacts an equity valuation. Well, the company’s share price theoretically represents the value of its equity portion only. However, it’s crucial to account for debt as well, since debt represents a liability to the owner, and it impacts the earnings capacity and risk profile of the company. By using enterprise value (EV) rather than current share price, the multiple incorporates debt, allowing us to recognise both sources of funding. This is frequently used in the EV/EBITDA multiple. Comparing LOMA’s multiple to the 10.26x for the industry suggests the company is fairly valued, as opposed to the previous overvaluation indicated by the PE ratio.

Will LOMA experience high growth?

Given that net income is forecasted to grow by 30.80% each year for the next 5 years, growth will be significant if this is realised. The issue with using current earnings in the denominator of a multiple is that it doesn’t reflect this expected growth, which isn’t ideal as you are using past values to gauge future performance. You should pay for what you’re going to get, not what’s already happened. To account for this growth we can use the one-year analyst-consensus future EBITDA (this is a “forward” multiple).

LOMA’s multiple falls behind the industry’s 8.13x. This implies an undervaluation on a forward basis, which differs from the fair market value LOMA’s past EV/EBITDA ratio suggested.

Next Steps:

Basing your investment decision based on relative valuation metrics alone is certainly no sufficient. There are many important factors I have not taken into account in this article. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for ’s future growth? Take a look at our free research report of analyst consensus for ’s outlook.
2. Past Track Record: Has been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of 's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.