Here's Why Jensen-Group (EBR:JEN) Can Manage Its Debt Responsibly

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.' 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, Jensen-Group NV (EBR:JEN) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jensen-Group

How Much Debt Does Jensen-Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Jensen-Group had €45.7m of debt, an increase on €36.1m, over one year. However, its balance sheet shows it holds €70.8m in cash, so it actually has €25.0m net cash.

How Strong Is Jensen-Group's Balance Sheet?

According to the last reported balance sheet, Jensen-Group had liabilities of €76.4m due within 12 months, and liabilities of €65.9m due beyond 12 months. Offsetting this, it had €70.8m in cash and €87.8m in receivables that were due within 12 months. So it can boast €16.2m more liquid assets than total liabilities.

This surplus suggests that Jensen-Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jensen-Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jensen-Group's load is not too heavy, because its EBIT was down 35% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jensen-Group'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jensen-Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jensen-Group recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jensen-Group has net cash of €25.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in €36m. So we don't have any problem with Jensen-Group's use of 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. Be aware that Jensen-Group is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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