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.' 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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jerónimo Martins SGPS

What Is Jerónimo Martins SGPS's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Jerónimo Martins SGPS had €697.0m of debt, an increase on €470.0m, over one year. However, its balance sheet shows it holds €1.76b in cash, so it actually has €1.07b net cash.

How Strong Is Jerónimo Martins SGPS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jerónimo Martins SGPS had liabilities of €6.86b due within 12 months and liabilities of €3.09b due beyond that. Offsetting this, it had €1.76b in cash and €586.0m in receivables that were due within 12 months. So it has liabilities totalling €7.61b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Jerónimo Martins SGPS is worth a massive €13.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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.

Also positive, Jerónimo Martins SGPS grew its EBIT by 21% in the last year, and that should make it easier to pay down debt, going forward. 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. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Jerónimo Martins SGPS does have more liabilities than liquid assets, it also has net cash of €1.07b. And it impressed us with free cash flow of €1.2b, being 112% of its EBIT. So we don't have any problem with Jerónimo Martins SGPS's use of debt. 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.