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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

As you can see below, at the end of March 2023, Loma Negra Compañía Industrial Argentina Sociedad Anónima had AR$42.3b of debt, up from AR$992.7m a year ago. Click the image for more detail. However, because it has a cash reserve of AR$19.4b, its net debt is less, at about AR$22.9b.

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$36.6b due within 12 months and liabilities of AR$76.4b due beyond that. On the other hand, it had cash of AR$19.4b and AR$17.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AR$76.5b.

Loma Negra Compañía Industrial Argentina Sociedad Anónima has a market capitalization of AR$186.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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 0.64 and interest cover of 2.9 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 grew its EBIT by 60% over the last twelve months, and that growth will make it easier to handle its debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

Happily, Loma Negra Compañía Industrial Argentina Sociedad Anónima's impressive EBIT growth rate implies it has the upper hand on its debt. But we must concede we find its interest cover has the opposite effect. Taking all this data into account, it seems to us that Loma Negra Compañía Industrial Argentina Sociedad Anónima takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. 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. 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 you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.