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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA), it didn't seem to tick all of these boxes.
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. 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)
0.14 = AR$15b ÷ (AR$121b - AR$16b) (Based on the trailing twelve months to March 2022).
Thus, Loma Negra Compañía Industrial Argentina Sociedad Anónima has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 11% generated by the Basic Materials industry.
View our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima
Above you can see how the current ROCE for Loma Negra Compañía Industrial Argentina Sociedad Anónima compares to its prior returns on capital, but there's only so much you can tell from the past. 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 Can We Tell From Loma Negra Compañía Industrial Argentina Sociedad Anónima's ROCE Trend?
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 14% from 59% five years ago. 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 related note, Loma Negra Compañía Industrial Argentina Sociedad Anónima has decreased its current liabilities to 13% of total assets. Considering it used to be 64%, that's a huge drop in that ratio and it would explain the decline 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.