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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Jerónimo Martins SGPS

How Much Debt Does Jerónimo Martins SGPS Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Jerónimo Martins SGPS had €799.0m of debt, an increase on €613.0m, over one year. But on the other hand it also has €1.32b in cash, leading to a €522.0m net cash position.

A Look At Jerónimo Martins SGPS' Liabilities

According to the last reported balance sheet, Jerónimo Martins SGPS had liabilities of €3.87b due within 12 months, and liabilities of €4.51b due beyond 12 months. Offsetting this, it had €1.32b in cash and €898.0m in receivables that were due within 12 months. So it has liabilities totalling €6.16b 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 €10.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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!

We saw Jerónimo Martins SGPS grow its EBIT by 3.0% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, Jerónimo Martins SGPS recorded free cash flow worth a fulsome 98% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

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 €522.0m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in €1.1b. So we don't have any problem with Jerónimo Martins SGPS's use of debt. There's no doubt that we learn most about debt from the balance sheet. 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.