Does Jerónimo Martins SGPS (ELI:JMT) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jerónimo Martins, SGPS, S.A. (ELI:JMT) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jerónimo Martins SGPS

What Is Jerónimo Martins SGPS's Debt?

The chart below, which you can click on for greater detail, shows that Jerónimo Martins SGPS had €470.0m in debt in December 2022; about the same as the year before. But it also has €1.80b in cash to offset that, meaning it has €1.33b net cash.

A Look At Jerónimo Martins SGPS' Liabilities

We can see from the most recent balance sheet that Jerónimo Martins SGPS had liabilities of €3.85b falling due within a year, and liabilities of €3.15b due beyond that. Offsetting this, it had €1.80b in cash and €562.0m in receivables that were due within 12 months. So its liabilities total €4.64b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jerónimo Martins SGPS is worth a massive €12.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jerónimo Martins SGPS boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Jerónimo Martins SGPS has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. 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 Jerónimo Martins SGPS 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. Jerónimo Martins SGPS 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, Jerónimo Martins SGPS actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Jerónimo Martins SGPS does have more liabilities than liquid assets, it also has net cash of €1.33b. And it impressed us with free cash flow of €1.1b, being 125% of its EBIT. So is Jerónimo Martins SGPS's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Jerónimo Martins SGPS, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.