Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. We note that Sanderson Farms, Inc. (NASDAQ:SAFM) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Sanderson Farms’s Net Debt?
As you can see below, at the end of April 2019, Sanderson Farms had US$100.0m of debt, up from none a year ago. Click the image for more detail. On the flip side, it has US$96.9m in cash leading to net debt of about US$3.06m.
How Strong Is Sanderson Farms’s Balance Sheet?
According to the last reported balance sheet, Sanderson Farms had liabilities of US$167.5m due within 12 months, and liabilities of US$179.5m due beyond 12 months. On the other hand, it had cash of US$96.9m and US$138.5m worth of receivables due within a year. So it has liabilities totalling US$111.6m more than its cash and near-term receivables, combined.
Since publicly traded Sanderson Farms shares are worth a total of US$3.18b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Sanderson Farms has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sanderson Farms 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.
In the last year Sanderson Farms actually shrunk its revenue by 5.8%, to US$3.2b. We would much prefer see growth.
Importantly, Sanderson Farms had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$11m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$209m in negative free cash flow over the last twelve months. So in short it’s a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Sanderson Farms insider transactions.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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