Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Could Be Struggling To Allocate Capital
Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. 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)
0.057 = AR$18b ÷ (AR$421b - AR$96b) (Based on the trailing twelve months to September 2023).
So, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 5.7%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 11%.
Check out 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 The Trend Of ROCE Can Tell Us
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 5.7% from 60% five years ago. 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 23% 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 On Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE
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. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing to note, we've identified 2 warning signs with Loma Negra Compañía Industrial Argentina Sociedad Anónima and understanding these should be part of your investment process.
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.
