Is Sanmina (NASDAQ:SANM) A Risky Investment?

By
Simply Wall St
Published
April 29, 2022
NasdaqGS:SANM
Source: Shutterstock

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 Sanmina Corporation (NASDAQ:SANM) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sanmina

What Is Sanmina's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sanmina had US$338.9m of debt in January 2022, down from US$369.6m, one year before. But on the other hand it also has US$627.7m in cash, leading to a US$288.8m net cash position.

debt-equity-history-analysis
NasdaqGS:SANM Debt to Equity History April 29th 2022

How Healthy Is Sanmina's Balance Sheet?

We can see from the most recent balance sheet that Sanmina had liabilities of US$2.07b falling due within a year, and liabilities of US$555.5m due beyond that. On the other hand, it had cash of US$627.7m and US$1.66b worth of receivables due within a year. So it has liabilities totalling US$330.3m more than its cash and near-term receivables, combined.

Of course, Sanmina has a market capitalization of US$2.54b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sanmina boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Sanmina grew its EBIT by 8.4% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sanmina's ability to maintain a healthy balance sheet going forward. 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. While Sanmina has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Sanmina actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Sanmina does have more liabilities than liquid assets, it also has net cash of US$288.8m. And it impressed us with free cash flow of US$263m, being 107% of its EBIT. So we don't think Sanmina's use of debt is risky. 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 Sanmina has 2 warning signs (and 1 which is concerning) we think you should know about.

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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