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.' 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. We can see that John B. Sanfilippo & Son, Inc. (NASDAQ:JBSS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does John B. Sanfilippo & Son Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 John B. Sanfilippo & Son had US$41.0m of debt, an increase on US$33.7m, over one year. On the flip side, it has US$1.98m in cash leading to net debt of about US$39.0m.

A Look At John B. Sanfilippo & Son's Liabilities

We can see from the most recent balance sheet that John B. Sanfilippo & Son had liabilities of US$128.3m falling due within a year, and liabilities of US$48.9m due beyond that. Offsetting this, it had US$1.98m in cash and US$77.4m in receivables that were due within 12 months. So it has liabilities totalling US$97.8m more than its cash and near-term receivables, combined.

Since publicly traded John B. Sanfilippo & Son shares are worth a total of US$1.15b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

John B. Sanfilippo & Son's net debt is only 0.35 times its EBITDA. And its EBIT easily covers its interest expense, being 41.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The good news is that John B. Sanfilippo & Son has increased its EBIT by 6.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since John B. Sanfilippo & Son will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, John B. Sanfilippo & Son recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

John B. Sanfilippo & Son's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. Zooming out, John B. Sanfilippo & Son seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - John B. Sanfilippo & Son has 1 warning sign we think you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.