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

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.' 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. As with many other companies Jerónimo Martins, SGPS, S.A. (ELI:JMT) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

See our latest analysis for Jerónimo Martins SGPS

How Much Debt Does Jerónimo Martins SGPS Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Jerónimo Martins SGPS had debt of €613.0m, up from €469.0m in one year. However, its balance sheet shows it holds €1.44b in cash, so it actually has €824.0m 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 €6.82b falling due within a year, and liabilities of €3.14b due beyond that. Offsetting these obligations, it had cash of €1.44b as well as receivables valued at €670.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €7.85b.

This deficit is considerable relative to its very significant market capitalization of €12.3b, so it does suggest shareholders should keep an eye on Jerónimo Martins SGPS' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Jerónimo Martins SGPS boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Jerónimo Martins SGPS grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jerónimo Martins SGPS's ability to maintain a healthy balance sheet going forward. 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

Although Jerónimo Martins SGPS's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €824.0m. And it impressed us with free cash flow of €994m, being 116% of its EBIT. So we are not troubled with Jerónimo Martins SGPS's debt use. 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.

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.

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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.