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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Jerónimo Martins, SGPS, S.A. (ELI:JMT) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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.

How Much Debt Does Jerónimo Martins SGPS Carry?

As you can see below, at the end of December 2024, Jerónimo Martins SGPS had €1.00b of debt, up from €765.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds €1.88b in cash, so it actually has €879.0m net cash.

How Healthy Is Jerónimo Martins SGPS' Balance Sheet?

According to the last reported balance sheet, Jerónimo Martins SGPS had liabilities of €4.09b due within 12 months, and liabilities of €4.92b due beyond 12 months. Offsetting this, it had €1.88b in cash and €821.0m in receivables that were due within 12 months. So it has liabilities totalling €6.31b more than its cash and near-term receivables, combined.

Jerónimo Martins SGPS has a very large market capitalization of €12.1b, so it could very likely raise cash to ameliorate 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!

Check out our latest analysis for Jerónimo Martins SGPS

Sadly, Jerónimo Martins SGPS's EBIT actually dropped 5.3% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 most recent three years, Jerónimo Martins SGPS recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Jerónimo Martins SGPS does have more liabilities than liquid assets, it also has net cash of €879.0m. And it impressed us with free cash flow of €470m, being 75% of its EBIT. 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Jerónimo Martins SGPS , and understanding them should be part of your investment process.

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.