Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.14 = AR$15b ÷ (AR$121b - AR$16b) (Based on the trailing twelve months to March 2022).

Therefore, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 11% it's much better.

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

In the above chart we have measured Loma Negra Compañía Industrial Argentina Sociedad Anónima's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE Trend?

In terms of Loma Negra Compañía Industrial Argentina Sociedad Anónima's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 14% from 59% five years ago. However it looks like Loma Negra Compañía Industrial Argentina Sociedad Anónima might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Loma Negra Compañía Industrial Argentina Sociedad Anónima has done well to pay down its current liabilities to 13% of total assets. Since the ratio used to be 64%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Loma Negra Compañía Industrial Argentina Sociedad Anónima is reinvesting in the business, but returns have been falling. Since the stock has declined 39% over the last three years, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Loma Negra Compañía Industrial Argentina Sociedad Anónima has the makings of a multi-bagger.

One more thing to note, we've identified 2 warning signs with Loma Negra Compañía Industrial Argentina Sociedad Anónima and understanding them should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.