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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Jerónimo Martins, SGPS, S.A. (ELI:JMT) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jerónimo Martins SGPS

What Is Jerónimo Martins SGPS's Debt?

As you can see below, Jerónimo Martins SGPS had €506.7m of debt at June 2021, down from €734.0m a year prior. However, its balance sheet shows it holds €933.6m in cash, so it actually has €426.9m net cash.

How Healthy Is Jerónimo Martins SGPS' Balance Sheet?

According to the last reported balance sheet, Jerónimo Martins SGPS had liabilities of €4.66b due within 12 months, and liabilities of €2.45b due beyond 12 months. Offsetting this, it had €933.6m in cash and €391.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €5.78b.

While this might seem like a lot, it is not so bad since Jerónimo Martins SGPS has a huge market capitalization of €11.5b, 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!

If Jerónimo Martins SGPS can keep growing EBIT at last year's rate of 16% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. 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 €426.9m. And it impressed us with free cash flow of €1.2b, being 119% of its EBIT. So we don't have any problem with Jerónimo Martins SGPS's use of debt. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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