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

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. We note that Jerónimo Martins, SGPS, S.A. (ELI:JMT) 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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jerónimo Martins SGPS

What Is Jerónimo Martins SGPS's Net Debt?

As you can see below, at the end of March 2024, Jerónimo Martins SGPS had €790.0m of debt, up from €477.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds €1.94b in cash, so it actually has €1.15b net cash.

How Strong Is Jerónimo Martins SGPS' Balance Sheet?

The latest balance sheet data shows that Jerónimo Martins SGPS had liabilities of €7.78b due within a year, and liabilities of €3.69b falling due after that. Offsetting these obligations, it had cash of €1.94b as well as receivables valued at €898.0m due within 12 months. So its liabilities total €8.63b more than the combination of its cash and short-term receivables.

This is a mountain of leverage even relative to its gargantuan market capitalization of €11.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Jerónimo Martins SGPS also has more cash than debt, so we're pretty confident it can manage its debt safely.

If Jerónimo Martins SGPS can keep growing EBIT at last year's rate of 10% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jerónimo Martins SGPS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Jerónimo Martins SGPS has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 generation warms our hearts like a puppy in a bumblebee suit.

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 €1.15b. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in €1.1b. So we are not troubled with Jerónimo Martins SGPS's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jerónimo Martins SGPS is showing 1 warning sign in our investment analysis , you should know about...

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.

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