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Is The J. M. Smucker Company’s (NYSE:SJM) Balance Sheet Strong Enough To Weather A Storm?

Ashwin Virk

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Investors pursuing a solid, dependable stock investment can often be led to The J. M. Smucker Company (NYSE:SJM), a large-cap worth US$12b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. 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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SJM here.

See our latest analysis for J. M. Smucker

Does SJM produce enough cash relative to debt?

SJM’s debt levels surged from US$5.3b to US$6.3b over the last 12 months – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$171m , ready to deploy into the business. Moreover, SJM has produced US$1.2b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 20%, signalling that SJM’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational 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 meet its short-term obligations with the cash in hand?

With current liabilities at US$1.4b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.25x. For Food companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:SJM Historical Debt February 11th 19

Can SJM service its debt comfortably?

With debt reaching 78% of equity, SJM may be thought of as relatively highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of SJM’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings after interest and tax 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 well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like SJM are considered a risk-averse investment.

Next Steps:

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. Keep in mind I haven’t considered other factors such as how SJM has been performing in the past. You should continue to research J. M. Smucker to get a more holistic view of the stock by looking at:

  1. 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.
  2. 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.
  3. 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 editorial-team@simplywallst.com.