Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) Has A Somewhat Strained Balance Sheet

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.' 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. As with many other companies Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) makes use of debt. But the real question is whether this debt is making the company risky.

We check all companies for important risks. See what we found for Loma Negra Compañía Industrial Argentina Sociedad Anónima in our free report.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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$170.9b of debt in December 2024, down from AR$320.9b, one year before. However, it also had AR$8.55b in cash, and so its net debt is AR$162.3b.

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$267.8b due within a year, and liabilities of AR$347.4b falling due after that. On the other hand, it had cash of AR$8.55b and AR$59.8b worth of receivables due within a year. So it has liabilities totalling AR$546.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Loma Negra Compañía Industrial Argentina Sociedad Anónima has a market capitalization of AR$1.45t, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

Check out our latest analysis for Loma Negra Compañía Industrial Argentina Sociedad Anónima

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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 very low debt to EBITDA ratio of 0.95 so it is strange to see weak interest coverage, with last year's EBIT being only 1.9 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Shareholders should be aware that Loma Negra Compañía Industrial Argentina Sociedad Anónima's EBIT was down 21% 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. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Loma Negra Compañía Industrial Argentina Sociedad Anónima recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

While Loma Negra Compañía Industrial Argentina Sociedad Anónima's interest cover makes us cautious about it, its track record of (not) growing its EBIT is no better. But at least its conversion of EBIT to free cash flow is a gleaming silver lining to those clouds. Taking the abovementioned factors together we do think Loma Negra Compañía Industrial Argentina Sociedad Anónima's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. Over time, share prices tend to follow earnings per share, so if you're interested in Loma Negra Compañía Industrial Argentina Sociedad Anónima, you may well want to click here to check an interactive graph of its earnings per share history.

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.