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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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?
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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.
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$3.96b of debt in September 2021, down from AR$6.11b, one year before. However, its balance sheet shows it holds AR$4.29b in cash, so it actually has AR$331.0m net cash.
A Look At Loma Negra Compañía Industrial Argentina Sociedad Anónima's Liabilities
According to the last reported balance sheet, Loma Negra Compañía Industrial Argentina Sociedad Anónima had liabilities of AR$15.7b due within 12 months, and liabilities of AR$14.3b due beyond 12 months. On the other hand, it had cash of AR$4.29b and AR$5.35b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AR$20.4b.
This deficit isn't so bad because Loma Negra Compañía Industrial Argentina Sociedad Anónima is worth AR$72.8b, and thus could probably raise enough capital to shore up 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. 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.
On top of that, Loma Negra Compañía Industrial Argentina Sociedad Anónima grew its EBIT by 47% 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. 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. 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.
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$331.0m. And we liked the look of last year's 47% year-on-year EBIT growth. So we don't have any problem with Loma Negra Compañía Industrial Argentina Sociedad Anónima's use of debt. 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. 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 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.
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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.