If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should watch out for. Generally, we will want to notice a growing trend to recover on capital employed (ROCE) and at the same time, a based capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. However, after briefly reviewing 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 see why it may be.
Return on capital employed (ROCE): what is it?
For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its return), relative to the capital employed in the company. The formula for this calculation on Loma Negra Compañía Industrial Argentina Sociedad Anónima is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.17 = AR $ 12 billion ÷ (AR $ 86 billion – AR $ 15 billion) (Based on the last twelve months up to June 2021).
Thereby, Loma Negra Compañía Industrial Argentina Sociedad Anónima has a ROCE of 17%. In absolute terms, this is a fairly normal return, and it is quite close to the 15% average for the basic materials industry.
See our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima
Above you can see how Loma Negra Compañía Industrial Argentina Sociedad Anónima’s current ROCE compares to its previous equity returns, but there is little you can say about the past. If you’d like to see what analysts are forecasting for the future, you should check out our free report for Loma Negra Compañía Industrial Argentina Sociedad Anónima.
What the ROCE trend can tell us
On the surface, the trend of ROCE in Loma Negra Compañía Industrial Argentina Sociedad Anónima does not inspire confidence. About five years ago, returns on capital were 51%, but since then they have fallen to 17%. On the flip side, the company has employed more capital with no corresponding improvement in sales over the past year, which might suggest that these investments are longer-term games. It’s worth keeping an eye on the company’s profits from now on to see if those investments end up contributing to the bottom line.
Loma Negra Compañía Industrial Argentina Sociedad Anónima has also been successful in reducing its current liabilities to 18% of total assets. So we could link some of that to the decrease in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE.
The bottom line
In summary, Loma Negra Compañía Industrial Argentina Sociedad Anónima is reinvesting funds in the company for growth, but unfortunately it seems that sales have not increased much yet. And investors seem reluctant to see the trends accelerate as the stock has fallen 31% in the past three years. Overall, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re looking for, we think you might have better luck elsewhere.
If you want to continue your research on Loma Negra Compañía Industrial Argentina Sociedad Anónima, you might be interested in the 1 warning sign that our analysis found.
While Loma Negra Compañía Industrial Argentina Sociedad Anónima does not achieve the highest return, check out this free list of companies that generate high returns on equity with strong balance sheets.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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