Is SJM HoldingsLtd (KRX:025530) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that SJM Holdings Co.,Ltd. (KRX:025530) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SJM HoldingsLtd

How Much Debt Does SJM HoldingsLtd Carry?

The chart below, which you can click on for greater detail, shows that SJM HoldingsLtd had ₩12.0b in debt in September 2020; about the same as the year before. But it also has ₩90.4b in cash to offset that, meaning it has ₩78.4b net cash.

How Strong Is SJM HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that SJM HoldingsLtd had liabilities of ₩37.8b due within a year, and liabilities of ₩16.4b falling due after that. On the other hand, it had cash of ₩90.4b and ₩44.9b worth of receivables due within a year. So it actually has ₩81.2b more liquid assets than total liabilities.

This surplus liquidity suggests that SJM HoldingsLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, SJM HoldingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, SJM HoldingsLtd grew its EBIT by 2.2% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SJM HoldingsLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. SJM HoldingsLtd 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. Happily for any shareholders, SJM HoldingsLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case SJM HoldingsLtd has ₩78.4b in net cash and a strong balance sheet. And it impressed us with free cash flow of ₩14b, being 202% of its EBIT. When it comes to SJM HoldingsLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 2 warning signs for SJM HoldingsLtd (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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