Warren Buffett said: “Volatility is far from synonymous with risk”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE: LOMA) uses debt. But should shareholders be concerned about its use of debt?

Why Does Debt Bring Risk?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both cash and debt levels.

What is the net debt of Loma Negra Compañía Industrial Argentina Sociedad Anónima?

You can click on the graph below for historical figures, but it shows that Loma Negra Compañía Industrial Argentina Sociedad Anónima had a debt of AR $ 3.96 billion in September 2021, compared to AR $ 6.11 billion a year. previously. But he also has AR $ 4.29 billion in cash to make up for that, which means he has net cash of AR $ 331.0 million.

NYSE Debt to Equity History: LOMA November 15, 2021

How strong is Loma Negra Compañía Industrial Argentina Sociedad Anónima’s balance sheet?

We can see from the most recent balance sheet that Loma Negra Compañía Industrial Argentina Sociedad Anónima had a liability of AR $ 15.7 billion due within one year and AR $ 14.3 billion liability due. beyond. On the other hand, he had cash of AR $ 4.29 billion and AR $ 5.35 billion in receivables due within one year. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by AR $ 20.4 billion.

While that might sound like a lot, it’s not that big of a deal since Loma Negra Compañía Industrial Argentina Sociedad Anónima has a market cap of AR $ 80.8 billion, and so it could likely strengthen its balance sheet by raising capital if needed. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. While she has some liabilities to note, Loma Negra Compañía Industrial Argentina Sociedad Anónima also has more cash than debt, so we’re pretty confident that she can handle her debt safely.

On top of that, Loma Negra Compañía Industrial Argentina Sociedad Anónima has increased its EBIT by 47% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Loma Negra Compañía Industrial Argentina Sociedad Anónima can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Although Loma Negra Compañía Industrial Argentina Sociedad Anónima has net cash on its balance sheet, it is still worth examining its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how how fast it is building (or eroding) that cash balance. Considering the past three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima has actually experienced an overall cash outflow. Debt is typically more expensive and almost always riskier in the hands of a business with negative free cash flow. Shareholders should hope for improvement.

In summary

While Loma Negra Compañía Industrial Argentina Sociedad Anónima has more liabilities than liquid assets, it also has net cash of AR $ 331.0 million. And it has impressed us with its EBIT growth of 47% over the past year. So we have no problem with the use of debt by Loma Negra Compañía Industrial Argentina Sociedad Anónima. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 1 warning sign for Loma Negra Compañía Industrial Argentina Sociedad Anónima you must be aware.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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