Is Jerónimo Martins SGPS (ELI:JMT) A Risky Investment?

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 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jerónimo Martins SGPS

What Is Jerónimo Martins SGPS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Jerónimo Martins SGPS had €491.7m of debt in September 2021, down from €547.8m, one year before. But on the other hand it also has €1.17b in cash, leading to a €677.1m net cash position.

A Look At Jerónimo Martins SGPS' Liabilities

The latest balance sheet data shows that Jerónimo Martins SGPS had liabilities of €4.72b due within a year, and liabilities of €2.43b falling due after that. On the other hand, it had cash of €1.17b and €420.4m worth of receivables due within a year. So its liabilities total €5.55b more than the combination of its cash and short-term receivables.

Jerónimo Martins SGPS has a very large market capitalization of €11.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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!

If Jerónimo Martins SGPS can keep growing EBIT at last year's rate of 18% over the last year, then it will find its debt load easier to manage. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Jerónimo Martins SGPS actually produced more free cash flow than EBIT. 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 €677.1m. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in €1.1b. So we are not troubled with Jerónimo Martins SGPS's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Jerónimo Martins SGPS's earnings per share history for free.

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. 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.