Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The size of The J. M. Smucker Company (NYSE:SJM), a US$12b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. This article will examine J. M. Smucker’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into SJM here.
How much cash does SJM generate through its operations?
Over the past year, SJM has ramped up its debt from US$5.3b to US$6.3b , which includes long-term debt. With this rise in debt, SJM currently has US$171m remaining in cash and short-term investments for investing into the business. Moreover, SJM has produced cash from operations of US$1.2b in the last twelve months, resulting in an operating cash to total debt ratio of 20%, meaning that SJM’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SJM’s case, it is able to generate 0.2x cash from its debt capital.
Can SJM pay its short-term liabilities?
With current liabilities at US$1.4b, the company has been able to meet these obligations given the level of current assets of US$1.8b, with a current ratio of 1.25x. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is SJM’s debt level acceptable?
With a debt-to-equity ratio of 78%, SJM can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can test if SJM’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SJM’s case, the ratio of 6.17x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes SJM and other large-cap investments thought to be safe.
SJM’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure SJM has company-specific issues impacting its capital structure decisions. You should continue to research J. M. Smucker to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SJM’s future growth? Take a look at our free research report of analyst consensus for SJM’s outlook.
- Valuation: What is SJM worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SJM is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.