Here's Why Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima

What Is Loma Negra Compañía Industrial Argentina Sociedad Anónima's Debt?

You can click the graphic below for the historical numbers, but it shows that Loma Negra Compañía Industrial Argentina Sociedad Anónima had AR$3.96b of debt in September 2021, down from AR$6.11b, one year before. But on the other hand it also has AR$4.29b in cash, leading to a AR$329.9m net cash position.

How Healthy Is Loma Negra Compañía Industrial Argentina Sociedad Anónima's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Loma Negra Compañía Industrial Argentina Sociedad Anónima had liabilities of AR$15.7b due within 12 months and liabilities of AR$14.3b due beyond that. Offsetting this, it had AR$4.29b in cash and AR$5.14b in receivables that were due within 12 months. So it has liabilities totalling AR$20.6b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Loma Negra Compañía Industrial Argentina Sociedad Anónima is worth AR$76.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Loma Negra Compañía Industrial Argentina Sociedad Anónima boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Loma Negra Compañía Industrial Argentina Sociedad Anónima grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Loma Negra Compañía Industrial Argentina Sociedad Anónima's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Loma Negra Compañía Industrial Argentina Sociedad Anónima has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While Loma Negra Compañía Industrial Argentina Sociedad Anónima does have more liabilities than liquid assets, it also has net cash of AR$329.9m. And we liked the look of last year's 25% year-on-year EBIT growth. So we are not troubled with Loma Negra Compañía Industrial Argentina Sociedad Anónima's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Loma Negra Compañía Industrial Argentina Sociedad Anónima you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.