We Think Sprouts Farmers Market (NASDAQ:SFM) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Sprouts Farmers Market, Inc. (NASDAQ:SFM) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sprouts Farmers Market

How Much Debt Does Sprouts Farmers Market Carry?

As you can see below, Sprouts Farmers Market had US$175.0m of debt at July 2023, down from US$250.0m a year prior. But it also has US$259.5m in cash to offset that, meaning it has US$84.5m net cash.

A Look At Sprouts Farmers Market's Liabilities

We can see from the most recent balance sheet that Sprouts Farmers Market had liabilities of US$538.2m falling due within a year, and liabilities of US$1.59b due beyond that. Offsetting this, it had US$259.5m in cash and US$13.6m in receivables that were due within 12 months. So it has liabilities totalling US$1.86b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sprouts Farmers Market is worth US$4.02b, 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, Sprouts Farmers Market boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sprouts Farmers Market grew its EBIT at 11% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sprouts Farmers Market 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sprouts Farmers Market 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. During the last three years, Sprouts Farmers Market produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Sprouts Farmers Market's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$84.5m. And it impressed us with free cash flow of US$288m, being 68% of its EBIT. So we don't have any problem with Sprouts Farmers Market's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Sprouts Farmers Market that you should be aware of before investing here.

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.