These 4 Measures Indicate That Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Is Using Debt Reasonably Well

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.' 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 A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that at March 2024 Loma Negra Compañía Industrial Argentina Sociedad Anónima had debt of AR$183.1b, up from AR$42.3b in one year. However, it also had AR$5.81b in cash, and so its net debt is AR$177.3b.

How Strong 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$168.8b due within 12 months and liabilities of AR$308.4b due beyond that. On the other hand, it had cash of AR$5.81b and AR$55.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AR$415.5b.

While this might seem like a lot, it is not so bad since Loma Negra Compañía Industrial Argentina Sociedad Anónima has a market capitalization of AR$717.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Even though Loma Negra Compañía Industrial Argentina Sociedad Anónima's debt is only 2.2, its interest cover is really very low at 0.76. This does suggest the company is paying fairly high interest rates. Either way there's no doubt the stock is using meaningful leverage. Pleasingly, Loma Negra Compañía Industrial Argentina Sociedad Anónima is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 121% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima produced sturdy free cash flow equating to 52% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Based on what we've seen Loma Negra Compañía Industrial Argentina Sociedad Anónima is not finding it easy, given its interest cover, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. Looking at all this data makes us feel a little cautious about Loma Negra Compañía Industrial Argentina Sociedad Anónima's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Loma Negra Compañía Industrial Argentina Sociedad Anónima is showing 1 warning sign in our investment analysis , you should know about...

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.