Does J&J Snack Foods (NASDAQ:JJSF) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 J&J Snack Foods Corp. (NASDAQ:JJSF) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for J&J Snack Foods

How Much Debt Does J&J Snack Foods Carry?

You can click the graphic below for the historical numbers, but it shows that J&J Snack Foods had US$12.0m of debt in June 2024, down from US$83.0m, one year before. But it also has US$64.0m in cash to offset that, meaning it has US$52.0m net cash.

How Healthy Is J&J Snack Foods' Balance Sheet?

The latest balance sheet data shows that J&J Snack Foods had liabilities of US$203.2m due within a year, and liabilities of US$239.6m falling due after that. Offsetting these obligations, it had cash of US$64.0m as well as receivables valued at US$208.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$170.0m.

Since publicly traded J&J Snack Foods shares are worth a total of US$3.24b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, J&J Snack Foods also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, J&J Snack Foods grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if J&J Snack Foods 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 company can only pay off debt with cold hard cash, not accounting profits. J&J Snack Foods 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. Looking at the most recent three years, J&J Snack Foods recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that J&J Snack Foods has US$52.0m in net cash. And it impressed us with its EBIT growth of 28% over the last year. So is J&J Snack Foods's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that J&J Snack Foods insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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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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.