We Think Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

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

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

You can click the graphic below for the historical numbers, but it shows that Loma Negra Compañía Industrial Argentina Sociedad Anónima had AR$992.7m of debt in March 2022, down from AR$6.69b, one year before. But on the other hand it also has AR$5.14b in cash, leading to a AR$4.15b net cash position.

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

According to the last reported balance sheet, Loma Negra Compañía Industrial Argentina Sociedad Anónima had liabilities of AR$16.2b due within 12 months, and liabilities of AR$17.7b due beyond 12 months. On the other hand, it had cash of AR$5.14b and AR$5.53b worth of receivables due within a year. So it has liabilities totalling AR$23.2b 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$69.8b, 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. While it does have liabilities worth noting, Loma Negra Compañía Industrial Argentina Sociedad Anónima also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Loma Negra Compañía Industrial Argentina Sociedad Anónima saw its EBIT decline by 7.1% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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. Loma Negra Compañía Industrial Argentina Sociedad Anónima may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While Loma Negra Compañía Industrial Argentina Sociedad Anónima does have more liabilities than liquid assets, it also has net cash of AR$4.15b. So we don't have any problem with Loma Negra Compañía Industrial Argentina Sociedad Anónima's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Loma Negra Compañía Industrial Argentina Sociedad Anónima (of which 1 doesn't sit too well with us!) 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.