These 4 Measures Indicate That John B. Sanfilippo & Son (NASDAQ:JBSS) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 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

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

The image below, which you can click on for greater detail, shows that John B. Sanfilippo & Son had debt of US$52.8m at the end of September 2022, a reduction from US$59.2m over a year. And it doesn't have much cash, so its net debt is about the same.

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

The latest balance sheet data shows that John B. Sanfilippo & Son had liabilities of US$126.2m due within a year, and liabilities of US$45.4m falling due after that. Offsetting this, it had US$298.0k in cash and US$77.0m in receivables that were due within 12 months. So it has liabilities totalling US$94.3m more than its cash and near-term receivables, combined.

Of course, John B. Sanfilippo & Son has a market capitalization of US$910.2m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

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 has a low net debt to EBITDA ratio of only 0.54. And its EBIT easily covers its interest expense, being 35.7 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the other side of the story is that John B. Sanfilippo & Son saw its EBIT decline by 9.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is John B. Sanfilippo & Son's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 56% 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

The good news is that John B. Sanfilippo & Son's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its EBIT growth rate. All these things considered, it appears that John B. Sanfilippo & Son can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for John B. Sanfilippo & Son 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.