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Howard Marks put it right when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk that concerns me … and every investor I practice. know worries ”. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk level of a business. Mostly, John B. Sanfilippo and Son, Inc. (NASDAQ: JBSS) is in debt. But should shareholders be concerned about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a business cannot easily repay it, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for John B. Sanfilippo & Son
What is the debt of John B. Sanfilippo & Son?
As you can see below, John B. Sanfilippo & Son had $ 34.1 million in debt in March 2021, up from $ 62.1 million the year before. However, he also had US $ 1.04 million in cash, so his net debt is US $ 33.0 million.
How healthy is John B. Sanfilippo & Son’s track record?
Zooming in on the latest balance sheet data, we can see that John B. Sanfilippo & Son had liabilities of $ 106.7 million due within 12 months and liabilities of $ 54.7 million due beyond. . In return, he had US $ 1.04 million in cash and US $ 64.5 million in receivables due within 12 months. Its liabilities are therefore $ 95.8 million more than the combination of its cash and short-term receivables.
Given that the publicly traded shares of John B. Sanfilippo & Son are worth a total of US $ 1.06 billion, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute quantum of the debt (with net debt over EBITDA) and the actual interest charges associated with that debt (with its interest coverage ratio).
John B. Sanfilippo & Son’s net debt represents only 0.35 times its EBITDA. And its EBIT covers its interest costs 47.9 times more. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. John B. Sanfilippo & Son’s EBIT has been fairly stable over the past year, but that shouldn’t be a problem as he doesn’t have a lot of debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine John B. Sanfilippo & Son’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
But our last consideration is also important, because a company cannot pay its debt with profits on paper; he needs cash. We must therefore clearly consider whether this EBIT leads to a corresponding free cash flow. Fortunately for all shareholders, John B. Sanfilippo & Son has actually produced more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
Fortunately, John B. Sanfilippo & Son’s impressive interest coverage suggests that it has the upper hand on its debt. And that’s just the start of the good news as its conversion from EBIT to free cash flow is also very encouraging. Looking at the big picture, we think John B. Sanfilippo & Son’s use of debt seems perfectly reasonable and we are not worried about that. After all, reasonable leverage can increase returns on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – John B. Sanfilippo & Son a 2 warning signs we think you should be aware of this.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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