Jerónimo Martins SGPS (ELI:JMT) Has A Pretty Healthy Balance Sheet

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jerónimo Martins, SGPS, S.A. (ELI:JMT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Jerónimo Martins SGPS

What Is Jerónimo Martins SGPS's Net Debt?

As you can see below, Jerónimo Martins SGPS had €529.6m of debt at March 2021, down from €685.8m a year prior. But on the other hand it also has €1.03b in cash, leading to a €498.3m net cash position.

A Look At Jerónimo Martins SGPS' Liabilities

According to the last reported balance sheet, Jerónimo Martins SGPS had liabilities of €4.64b due within 12 months, and liabilities of €2.42b due beyond 12 months. Offsetting this, it had €1.03b in cash and €390.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €5.63b.

This deficit isn't so bad because Jerónimo Martins SGPS is worth a massive €10.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Sadly, Jerónimo Martins SGPS's EBIT actually dropped 2.2% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. There's no doubt that we learn most about debt from the balance sheet. 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 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 actually produced more free cash flow than EBIT. 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 €498.3m. And it impressed us with free cash flow of €1.0b, being 108% 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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