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There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)
0.13 = AR$6.3b ÷ (AR$64b - AR$16b) (Based on the trailing twelve months to September 2020).
Therefore, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Basic Materials industry average of 9.9% it's much better.
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'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 Can We Tell From Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE Trend?
When we looked at the ROCE trend at Loma Negra Compañía Industrial Argentina Sociedad Anónima, we didn't gain much confidence. Around five years ago the returns on capital were 44%, but since then they've fallen to 13%. And considering revenue has dropped while employing more capital, we'd be cautious. 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 side note, Loma Negra Compañía Industrial Argentina Sociedad Anónima has done well to pay down its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.
Our Take On Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE
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. This could explain why the stock has sunk a total of 76% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a final note, we've found 2 warning signs for Loma Negra Compañía Industrial Argentina Sociedad Anónima that we think 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.
This article by Simply Wall St is general in nature. 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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