Warren Buffett famously said, '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 Jumbo S.A. (ATH:BELA) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Jumbo
How Much Debt Does Jumbo Carry?
As you can see below, at the end of December 2018, Jumbo had €199.2m of debt, up from €144.8m a year ago. Click the image for more detail. But it also has €590.8m in cash to offset that, meaning it has €391.6m net cash.
How Healthy Is Jumbo's Balance Sheet?
According to the last reported balance sheet, Jumbo had liabilities of €171.1m due within 12 months, and liabilities of €229.2m due beyond 12 months. Offsetting this, it had €590.8m in cash and €89.8m in receivables that were due within 12 months. So it actually has €280.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Jumbo could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Jumbo has more cash than debt is arguably a good indication that it can manage its debt safely.
Also good is that Jumbo grew its EBIT at 11% over the last year, further increasing its ability to manage debt. 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 Jumbo'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 report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jumbo 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. During the last three years, Jumbo produced sturdy free cash flow equating to 50% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.