Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) May Have Issues Allocating Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Loma Negra Compañía Industrial Argentina Sociedad Anónima:

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

0.096 = AR$13b ÷ (AR$168b - AR$36b) (Based on the trailing twelve months to September 2022).

Therefore, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Basic Materials industry average of 9.1%.

View 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

On the surface, the trend of ROCE at Loma Negra Compañía Industrial Argentina Sociedad Anónima doesn't inspire confidence. Around five years ago the returns on capital were 53%, but since then they've fallen to 9.6%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Loma Negra Compañía Industrial Argentina Sociedad Anónima has decreased its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. 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 Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Loma Negra Compañía Industrial Argentina Sociedad Anónima have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 57% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Loma Negra Compañía Industrial Argentina Sociedad Anónima, we've discovered 1 warning sign that you should be aware of.

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.