Loma Negra Compañía Industrial Argentina Sociedad Anónima's (NYSE:LOMA) Returns On Capital Not Reflecting Well On The Business

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Loma Negra Compañía Industrial Argentina Sociedad Anónima is:

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

0.17 = AR$12b ÷ (AR$86b - AR$15b) (Based on the trailing twelve months to June 2021).

Thus, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Basic Materials industry average of 15%.

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 to see what analysts are forecasting going forward, you should check out our free report for Loma Negra Compañía Industrial Argentina Sociedad Anónima.

What The Trend Of ROCE Can Tell Us

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 51%, but since then they've fallen to 17%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Loma Negra Compañía Industrial Argentina Sociedad Anónima has done well to pay down its current liabilities to 18% 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. 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

In summary, Loma Negra Compañía Industrial Argentina Sociedad Anónima is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 31% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to continue researching Loma Negra Compañía Industrial Argentina Sociedad Anónima, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Loma Negra Compañía Industrial Argentina Sociedad Anónima isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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.

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