Does Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Have A Healthy Balance Sheet?
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.' 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 should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out 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 Loma Negra Compañía Industrial Argentina Sociedad Anónima had debt of AR$2.51b at the end of December 2021, a reduction from AR$6.69b over a year. But on the other hand it also has AR$5.27b in cash, leading to a AR$2.76b net cash position.
A Look At Loma Negra Compañía Industrial Argentina Sociedad Anónima's Liabilities
The latest balance sheet data shows that Loma Negra Compañía Industrial Argentina Sociedad Anónima had liabilities of AR$16.6b due within a year, and liabilities of AR$15.7b falling due after that. On the other hand, it had cash of AR$5.27b and AR$4.89b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AR$22.2b.
Loma Negra Compañía Industrial Argentina Sociedad Anónima has a market capitalization of AR$75.9b, so it could very likely raise cash to ameliorate 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.
Also positive, Loma Negra Compañía Industrial Argentina Sociedad Anónima grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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'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. While Loma Negra Compañía Industrial Argentina Sociedad Anónima has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima reported free cash flow worth 16% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.
Summing up
Although Loma Negra Compañía Industrial Argentina Sociedad Anónima's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AR$2.76b. And it impressed us with its EBIT growth of 25% over the last year. So we don't have any problem with Loma Negra Compañía Industrial Argentina Sociedad Anónima's use of debt. 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 2 warning signs for Loma Negra Compañía Industrial Argentina Sociedad Anónima that you should be aware of before investing here.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
