Is J Sainsbury (LON:SBRY) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 J Sainsbury plc (LON:SBRY) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for J Sainsbury

How Much Debt Does J Sainsbury Carry?

The image below, which you can click on for greater detail, shows that at March 2024 J Sainsbury had debt of UK£1.28b, up from UK£730.0m in one year. But it also has UK£1.99b in cash to offset that, meaning it has UK£705.0m net cash.

How Healthy Is J Sainsbury's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that J Sainsbury had liabilities of UK£11.5b due within 12 months and liabilities of UK£6.74b due beyond that. On the other hand, it had cash of UK£1.99b and UK£582.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£15.6b.

The deficiency here weighs heavily on the UK£6.68b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, J Sainsbury would likely require a major re-capitalisation if it had to pay its creditors today. J Sainsbury boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Unfortunately, J Sainsbury saw its EBIT slide 3.3% in the last twelve months. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if J Sainsbury can strengthen its balance sheet over time. 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. J Sainsbury may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, J Sainsbury recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While J Sainsbury does have more liabilities than liquid assets, it also has net cash of UK£705.0m. And it impressed us with free cash flow of UK£406m, being 71% of its EBIT. Despite the cash, we do find J Sainsbury's level of total liabilities concerning, so we're not particularly comfortable with the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for J Sainsbury (of which 1 is potentially serious!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.