SJM HoldingsLtd (KRX:025530) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that SJM Holdings Co.,Ltd. (KRX:025530) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SJM HoldingsLtd

What Is SJM HoldingsLtd's Net Debt?

As you can see below, SJM HoldingsLtd had ₩12.0b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩90.4b in cash offsetting this, leading to net cash of ₩78.4b.

How Strong Is SJM HoldingsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SJM HoldingsLtd had liabilities of ₩37.8b due within 12 months and liabilities of ₩16.4b due beyond that. Offsetting this, it had ₩90.4b in cash and ₩44.9b in receivables that were due within 12 months. So it actually has ₩81.2b more liquid assets than total liabilities.

This surplus strongly suggests that SJM HoldingsLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Succinctly put, SJM HoldingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that SJM HoldingsLtd has increased its EBIT by 2.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that SJM HoldingsLtd has net cash of ₩78.4b and plenty of liquid assets. The cherry on top was that in converted 202% of that EBIT to free cash flow, bringing in ₩14b. When it comes to SJM HoldingsLtd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 SJM HoldingsLtd is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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