There Are Reasons To Feel Uneasy About Loma Negra Compañía Industrial Argentina Sociedad Anónima's (NYSE:LOMA) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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)

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)

0.048 = AR$47b ÷ (AR$1.2t - AR$190b) (Based on the trailing twelve months to June 2024).

Therefore, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average 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 for free.

How Are Returns Trending?

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 4.8% from 27% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Loma Negra Compañía Industrial Argentina Sociedad Anónima has decreased its current liabilities to 16% 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

We're a bit apprehensive about Loma Negra Compañía Industrial Argentina Sociedad Anónima because despite more capital being deployed in the business, returns on that capital and sales have both fallen. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 83% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Loma Negra Compañía Industrial Argentina Sociedad Anónima that you might find interesting.

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.

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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.