Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at 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 Loma Negra Compañía Industrial Argentina Sociedad Anónima had debt of AR$5.40b at the end of June 2021, a reduction from AR$17.5b over a year. On the flip side, it has AR$2.91b in cash leading to net debt of about AR$2.48b.

A Look At Loma Negra Compañía Industrial Argentina Sociedad Anónima's Liabilities

Zooming in on the latest balance sheet data, we can see that Loma Negra Compañía Industrial Argentina Sociedad Anónima had liabilities of AR$15.2b due within 12 months and liabilities of AR$13.2b due beyond that. On the other hand, it had cash of AR$2.91b and AR$4.85b worth of receivables due within a year. So its liabilities total AR$20.6b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Loma Negra Compañía Industrial Argentina Sociedad Anónima is worth AR$80.0b, 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.

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.

Loma Negra Compañía Industrial Argentina Sociedad Anónima has a low net debt to EBITDA ratio of only 0.15. And its EBIT easily covers its interest expense, being 21.8 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Loma Negra Compañía Industrial Argentina Sociedad Anónima grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 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. So it's worth checking how much of that EBIT is backed by free cash flow. Considering the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

The good news is that Loma Negra Compañía Industrial Argentina Sociedad Anónima's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Looking at all the aforementioned factors together, it strikes us that Loma Negra Compañía Industrial Argentina Sociedad Anónima can handle its debt fairly comfortably. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Loma Negra Compañía Industrial Argentina Sociedad Anónima you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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