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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Loma Negra Compañía Industrial Argentina Sociedad Anónima Carry?
As you can see below, at the end of June 2024, Loma Negra Compañía Industrial Argentina Sociedad Anónima had AR$201.0b of debt, up from AR$71.7b a year ago. Click the image for more detail. Net debt is about the same, since the it doesn't have much cash.
A Look At Loma Negra Compañía Industrial Argentina Sociedad Anónima's Liabilities
We can see from the most recent balance sheet that Loma Negra Compañía Industrial Argentina Sociedad Anónima had liabilities of AR$190.2b falling due within a year, and liabilities of AR$346.9b due beyond that. Offsetting this, it had AR$3.08b in cash and AR$63.1b in receivables that were due within 12 months. So it has liabilities totalling AR$470.9b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of AR$739.2b, so it does suggest shareholders should keep an eye on Loma Negra Compañía Industrial Argentina Sociedad Anónima's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Loma Negra Compañía Industrial Argentina Sociedad Anónima has a debt to EBITDA ratio of 2.7, which signals significant debt, but is still pretty reasonable for most types of business. But its EBIT was about 1k times its interest expense, implying the company isn't really paying a high cost to maintain that level of debt. Even were the low cost to prove unsustainable, that is a good sign. Shareholders should be aware that Loma Negra Compañía Industrial Argentina Sociedad Anónima's EBIT was down 48% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Our View
Mulling over Loma Negra Compañía Industrial Argentina Sociedad Anónima's attempt at (not) growing its EBIT, we're certainly not enthusiastic. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Once we consider all the factors above, together, it seems to us that Loma Negra Compañía Industrial Argentina Sociedad Anónima's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign 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.