Stock Analysis

Is John B. Sanfilippo & Son (NASDAQ:JBSS) Using Too Much Debt?

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NasdaqGS:JBSS
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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What Is John B. Sanfilippo & Son's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 John B. Sanfilippo & Son had US$53.0m of debt, an increase on US$42.9m, over one year. And it doesn't have much cash, so its net debt is about the same.

debt-equity-history-analysis
NasdaqGS:JBSS Debt to Equity History January 15th 2021

How Healthy Is John B. Sanfilippo & Son's Balance Sheet?

The latest balance sheet data shows that John B. Sanfilippo & Son had liabilities of US$117.6m due within a year, and liabilities of US$55.8m falling due after that. Offsetting these obligations, it had cash of US$743.0k as well as receivables valued at US$69.9m due within 12 months. So its liabilities total US$102.8m more than the combination of its cash and short-term receivables.

Given John B. Sanfilippo & Son has a market capitalization of US$916.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

John B. Sanfilippo & Son has a low net debt to EBITDA ratio of only 0.57. And its EBIT easily covers its interest expense, being 38.5 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that John B. Sanfilippo & Son grew its EBIT by 16% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine John B. Sanfilippo & Son's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, John B. Sanfilippo & Son generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Happily, John B. Sanfilippo & Son's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Overall, we don't think John B. Sanfilippo & Son is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for John B. Sanfilippo & Son you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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What are the risks and opportunities for John B. Sanfilippo & Son?

John B. Sanfilippo & Son, Inc., through its subsidiary, JBSS Ventures, LLC, processes and distributes tree nuts and peanuts in the United States.

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Rewards

  • Price-To-Earnings ratio (16.2x) is below the Food industry average (17.9x)

Risks

  • Significant insider selling over the past 3 months

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