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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SJM Holdings Limited (HKG:880) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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.
See our latest analysis for SJM Holdings
What Is SJM Holdings's Debt?
As you can see below, SJM Holdings had HK$15.7b of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has HK$16.5b in cash, leading to a HK$800.0m net cash position.
How Strong Is SJM Holdings's Balance Sheet?
The latest balance sheet data shows that SJM Holdings had liabilities of HK$15.2b due within a year, and liabilities of HK$14.7b falling due after that. Offsetting this, it had HK$16.5b in cash and HK$1.10b in receivables that were due within 12 months. So its liabilities total HK$12.3b more than the combination of its cash and short-term receivables.
SJM Holdings has a market capitalization of HK$43.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, SJM Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also positive, SJM Holdings grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 SJM Holdings 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.