What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA), it didn't seem to tick all of these boxes.
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. 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)
0.057 = AR$18b ÷ (AR$421b - AR$96b) (Based on the trailing twelve months to September 2023).
Thus, 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%.
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.
The Trend Of ROCE
On the surface, the trend of ROCE at Loma Negra Compañía Industrial Argentina Sociedad Anónima doesn't inspire confidence. Around five years ago the returns on capital were 60%, but since then they've fallen to 5.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
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. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Key Takeaway
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. Investors haven't taken kindly to these developments, since the stock has declined 17% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing, we've spotted 2 warning signs facing Loma Negra Compañía Industrial Argentina Sociedad Anónima that you might find interesting.
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.