David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We can see that SpartanNash Company (NASDAQ: SPTN) uses debt in its business. But does this debt worry shareholders?

When is debt a problem?

Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for SpartanNash

What is the debt of SpartanNash?

You can click on the graph below for historical numbers, but it shows that SpartanNash had $ 527.1 million in debt as of April 2021, up from $ 597.3 million a year earlier. However, because it has a cash reserve of US $ 23.3 million, its net debt is less, at approximately US $ 503.8 million.

Is SpartanNash’s track record healthy?

Zooming in on the latest balance sheet data, we can see that SpartanNash had liabilities of US $ 629.0 million due within 12 months and liabilities of US $ 896.0 million due beyond. In compensation for these obligations, it had cash of US $ 23.3 million as well as receivables valued at US $ 346.7 million maturing within 12 months. Its liabilities therefore total US $ 1.16 billion more than the combination of its cash and short-term receivables.

Given that this deficit is actually greater than the company’s market cap of $ 773.8 million, we think shareholders should really watch SpartanNash’s debt levels, like a parent watching their child go crazy. cycling for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer a significant dilution.

In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

With a debt to EBITDA ratio of 2.3, SpartanNash uses debt smartly but responsibly. And the fact that her last twelve months of EBIT was 8.1 times her interest expense ties in with that theme. It is important to note that SpartanNash has increased its EBIT by 80% over the past twelve months, and this growth will make it easier to process its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether SpartanNash can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, SpartanNash has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

Our point of view

SpartanNash’s ability to convert EBIT to free cash flow and its EBIT growth rate have supported us in its ability to manage its debt. In contrast, our confidence was undermined by his apparent struggle to manage his total liabilities. Looking at all of this data, we feel a little cautious about SpartanNash’s debt levels. While debt has its advantage in terms of potential higher returns, we believe shareholders should definitely consider how leverage levels might make the stock riskier. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 2 warning signs we spotted with SpartanNash.

At the end of the day, it’s often best to focus on businesses that don’t have 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. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 material. Simply Wall St has no position in the mentioned stocks.
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