J&J Snack Foods (NASDAQ:JJSF) Has A Somewhat Strained Balance Sheet

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.' 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 J&J Snack Foods Corp. (NASDAQ:JJSF) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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

Check out our latest analysis for J&J Snack Foods

What Is J&J Snack Foods's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 J&J Snack Foods had debt of US$92.0m, up from none in one year. However, it also had US$43.3m in cash, and so its net debt is US$48.7m.

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

According to the last reported balance sheet, J&J Snack Foods had liabilities of US$159.1m due within 12 months, and liabilities of US$207.6m due beyond 12 months. Offsetting this, it had US$43.3m in cash and US$198.4m in receivables that were due within 12 months. So its liabilities total US$124.9m more than the combination of its cash and short-term receivables.

Of course, J&J Snack Foods has a market capitalization of US$3.04b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

J&J Snack Foods's net debt is only 0.39 times its EBITDA. And its EBIT covers its interest expense a whopping 39.2 times over. So we're pretty relaxed about its super-conservative use of debt. It is just as well that J&J Snack Foods's load is not too heavy, because its EBIT was down 21% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 two years, J&J Snack Foods burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While J&J Snack Foods's EBIT growth rate has us nervous. To wit both its interest cover and net debt to EBITDA were encouraging signs. Taking the abovementioned factors together we do think J&J Snack Foods's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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. Case in point: We've spotted 2 warning signs for J&J Snack Foods you should be aware of, and 1 of them is concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.