Is Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima

How Much Debt Does Loma Negra Compañía Industrial Argentina Sociedad Anónima Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Loma Negra Compañía Industrial Argentina Sociedad Anónima had debt of AR$23.2b, up from AR$3.96b in one year. On the flip side, it has AR$3.47b in cash leading to net debt of about AR$19.7b.

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

We can see from the most recent balance sheet that Loma Negra Compañía Industrial Argentina Sociedad Anónima had liabilities of AR$36.1b falling due within a year, and liabilities of AR$36.2b due beyond that. Offsetting these obligations, it had cash of AR$3.47b as well as receivables valued at AR$10.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AR$58.0b.

Loma Negra Compañía Industrial Argentina Sociedad Anónima has a market capitalization of AR$148.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 0.99 and interest cover of 3.1 times, it seems to us that Loma Negra Compañía Industrial Argentina Sociedad Anónima is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Importantly, Loma Negra Compañía Industrial Argentina Sociedad Anónima's EBIT fell a jaw-dropping 50% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Loma Negra Compañía Industrial Argentina Sociedad Anónima can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima's free cash flow amounted to 49% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Mulling over Loma Negra Compañía Industrial Argentina Sociedad Anónima's attempt at (not) growing its EBIT, we're certainly not enthusiastic. But at least it's pretty decent at managing its debt, based on its EBITDA,; that's encouraging. Once we consider all the factors above, together, it seems to us that Loma Negra Compañía Industrial Argentina Sociedad Anónima's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Loma Negra Compañía Industrial Argentina Sociedad Anónima that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.