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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Jerónimo Martins, SGPS, S.A. (ELI:JMT) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jerónimo Martins SGPS

What Is Jerónimo Martins SGPS's Debt?

As you can see below, at the end of March 2023, Jerónimo Martins SGPS had €477.0m of debt, up from €451.0m a year ago. Click the image for more detail. But on the other hand it also has €1.58b in cash, leading to a €1.11b net cash position.

How Strong Is Jerónimo Martins SGPS' Balance Sheet?

The latest balance sheet data shows that Jerónimo Martins SGPS had liabilities of €6.42b due within a year, and liabilities of €2.87b falling due after that. Offsetting these obligations, it had cash of €1.58b as well as receivables valued at €613.0m due within 12 months. So its liabilities total €7.10b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jerónimo Martins SGPS is worth a massive €15.9b, 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. Despite its noteworthy liabilities, Jerónimo Martins SGPS boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Jerónimo Martins SGPS has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jerónimo Martins SGPS can strengthen its balance sheet over time. 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. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 €1.11b. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in €1.2b. So is Jerónimo Martins SGPS's debt a risk? It doesn't seem so to us. 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.