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Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Is Employing Capital Very Effectively

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Today we are going to look at Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Loma Negra Compañía Industrial Argentina Sociedad Anónima:

0.15 = AR$5.4b ÷ (AR$52b - AR$15b) (Based on the trailing twelve months to September 2019.)

So, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 15%.

View our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima

Does Loma Negra Compañía Industrial Argentina Sociedad Anónima Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE is meaningfully better than the 9.8% average in the Basic Materials industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Loma Negra Compañía Industrial Argentina Sociedad Anónima sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Loma Negra Compañía Industrial Argentina Sociedad Anónima's current ROCE of 15% is lower than 3 years ago, when the company reported a 54% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE compares to its industry. Click to see more on past growth.

NYSE:LOMA Past Revenue and Net Income, January 7th 2020
NYSE:LOMA Past Revenue and Net Income, January 7th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Loma Negra Compañía Industrial Argentina Sociedad Anónima.

Do Loma Negra Compañía Industrial Argentina Sociedad Anónima's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Loma Negra Compañía Industrial Argentina Sociedad Anónima has total liabilities of AR$15b and total assets of AR$52b. Therefore its current liabilities are equivalent to approximately 29% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE

With that in mind, Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE appears pretty good. There might be better investments than Loma Negra Compañía Industrial Argentina Sociedad Anónima out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.