Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE: LOMA) appears to be using debt fairly sensibly
Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Above all, Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE: LOMA) is in debt. But does this debt worry shareholders?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own 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, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima
What is the debt of Loma Negra Compañía Industrial Argentina Sociedad Anónima?
The image below, which you can click for more details, shows that Loma Negra Compañía Industrial Argentina Sociedad Anónima had a debt of AR $ 5.40 billion at the end of June 2021, a reduction from 17, AR $ 5 billion over one year. On the other hand, he has AR $ 2.91 billion in cash, resulting in net debt of around AR $ 2.48 billion.
A look at the liabilities of Loma Negra Compañía Industrial Argentina Sociedad Anónima
Zooming in on the latest balance sheet data, we can see that Loma Negra Compañía Industrial Argentina Sociedad Anónima had AR $ 15.2 billion in liabilities due within 12 months and AR $ 13.2 billion in liabilities beyond. . On the other hand, he had cash of AR $ 2.91 billion and AR $ 4.85 billion in receivables due within one year. Its liabilities therefore total AR $ 20.6 billion more than the combination of its cash and short-term receivables.
This deficit is not that big as Loma Negra Compañía Industrial Argentina Sociedad Anónima is worth AR $ 80.0 billion, and could therefore probably raise enough capital to consolidate its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay your debt.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Loma Negra Compañía Industrial Argentina Sociedad Anónima has a low net debt / EBITDA ratio of just 0.15. And its EBIT easily covers its interest costs, being 21.8 times higher. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, Loma Negra Compañía Industrial Argentina Sociedad Anónima has increased its EBIT by 44% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. It is therefore worth checking to what extent this EBIT is supported by free cash flow. 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.
Our point of view
The good news is that Loma Negra Compañía Industrial Argentina Sociedad Anónima’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But the hard truth is that we are concerned about its conversion from EBIT to free cash flow. Looking at all of the aforementioned factors together, it seems to us that Loma Negra Compañía Industrial Argentina Sociedad Anónima can manage its debt quite comfortably. On the plus side, this leverage can increase returns to shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. 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 documents. Simply Wall St has no position in any of the stocks mentioned.
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