Does Fresh Del Monte Produce (NYSE:FDP) Have A Healthy Balance Sheet?

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 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. We can see that Fresh Del Monte Produce Inc. (NYSE:FDP) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Fresh Del Monte Produce

How Much Debt Does Fresh Del Monte Produce Carry?

You can click the graphic below for the historical numbers, but it shows that Fresh Del Monte Produce had US$486.1m of debt in September 2022, down from US$512.7m, one year before. However, it does have US$27.9m in cash offsetting this, leading to net debt of about US$458.2m.

A Look At Fresh Del Monte Produce's Liabilities

The latest balance sheet data shows that Fresh Del Monte Produce had liabilities of US$634.7m due within a year, and liabilities of US$803.7m falling due after that. Offsetting this, it had US$27.9m in cash and US$399.8m in receivables that were due within 12 months. So it has liabilities totalling US$1.01b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$1.34b, so it does suggest shareholders should keep an eye on Fresh Del Monte Produce's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Fresh Del Monte Produce has net debt worth 2.1 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 5.5 times the interest expense. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. One way Fresh Del Monte Produce could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 11%, as it did over the last year. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fresh Del Monte Produce 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.

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. Looking at the most recent three years, Fresh Del Monte Produce recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Neither Fresh Del Monte Produce's ability to handle its total liabilities nor its net debt to EBITDA gave us confidence in its ability to take on more debt. But we do take some comfort from its EBIT growth rate. Looking at all the angles mentioned above, it does seem to us that Fresh Del Monte Produce is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Fresh Del Monte Produce that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.