Returns On Capital Signal Tricky Times Ahead For Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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)
0.11 = AR$24b ÷ (AR$259b - AR$37b) (Based on the trailing twelve months to March 2023).
Therefore, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.
View 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'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 Does the ROCE Trend For Loma Negra Compañía Industrial Argentina Sociedad Anónima Tell Us?
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 57%, but since then they've fallen to 11%. However it looks like Loma Negra Compañía Industrial Argentina Sociedad Anónima might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 14% of total assets. So we could link some of this to the decrease in ROCE. 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.
The Key Takeaway
Bringing it all together, while we're somewhat encouraged by Loma Negra Compañía Industrial Argentina Sociedad Anónima's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Loma Negra Compañía Industrial Argentina Sociedad Anónima has the makings of a multi-bagger.
Loma Negra Compañía Industrial Argentina Sociedad Anónima does have some risks though, and we've spotted 3 warning signs for Loma Negra Compañía Industrial Argentina Sociedad Anónima that you might be interested in.
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.
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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.
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