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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. 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?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for John B. Sanfilippo & Son

How Much Debt Does John B. Sanfilippo & Son Carry?

The image below, which you can click on for greater detail, shows that at March 2024 John B. Sanfilippo & Son had debt of US$40.7m, up from US$36.2m in one year. Net debt is about the same, since the it doesn't have much cash.

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

According to the last reported balance sheet, John B. Sanfilippo & Son had liabilities of US$120.4m due within 12 months, and liabilities of US$49.7m due beyond 12 months. On the other hand, it had cash of US$377.0k and US$75.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$94.1m.

Given John B. Sanfilippo & Son has a market capitalization of US$1.11b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

John B. Sanfilippo & Son's net debt is only 0.37 times its EBITDA. And its EBIT covers its interest expense a whopping 36.4 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, John B. Sanfilippo & Son saw its EBIT drop by 3.0% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is John B. Sanfilippo & Son's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, John B. Sanfilippo & Son produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, John B. Sanfilippo & Son's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its EBIT growth rate does undermine this impression a bit. Taking all this data into account, it seems to us that John B. Sanfilippo & Son takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with John B. Sanfilippo & Son .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com