Is Jerónimo Martins SGPS (ELI:JMT) Using Too Much Debt?

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.' 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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jerónimo Martins SGPS

How Much Debt Does Jerónimo Martins SGPS Carry?

As you can see below, Jerónimo Martins SGPS had €491.7m of debt at September 2021, down from €547.8m a year prior. But it also has €1.17b in cash to offset that, meaning it has €677.1m net cash.

How Healthy Is Jerónimo Martins SGPS' Balance Sheet?

We can see from the most recent balance sheet that Jerónimo Martins SGPS had liabilities of €4.72b falling due within a year, and liabilities of €2.43b due beyond that. On the other hand, it had cash of €1.17b and €420.4m worth of receivables due within a year. So it has liabilities totalling €5.55b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Jerónimo Martins SGPS has a huge market capitalization of €12.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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!

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 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. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Jerónimo Martins SGPS does have more liabilities than liquid assets, it also has net cash of €677.1m. And it impressed us with free cash flow of €1.1b, being 125% 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.