Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. It is 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. Above all, Sanmina Company (NASDAQ: SANM) is in debt. But the real question is whether this debt makes the business risky.
When Is Debt a Problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. 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. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Sanmina
How much debt does Sanmina have?
The image below, which you can click for more details, shows Sanmina owed $ 355.7 million in debt at the end of July 2021, a reduction from $ 1.04 billion. over a year. However, it has US $ 623.8 million in cash offsetting this, leading to net cash of US $ 268.1 million.
How strong is Sanmina’s balance sheet?
The latest balance sheet data shows that Sanmina had liabilities of US $ 1.59 billion due within one year, and liabilities of US $ 576.1 million due thereafter. On the other hand, he had cash of US $ 623.8 million and receivables worth US $ 1.50 billion within a year. These liquid assets therefore correspond roughly to the total liabilities.
Considering Sanmina’s size, it seems her liquid assets are well balanced with her total liabilities. So the $ 2.5 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. While she has some liabilities to note, Sanmina also has more cash than debt, so we’re pretty confident that she can handle her debt safely.
On top of that, Sanmina has increased its EBIT by 32% over the past twelve months, and this growth will make it easier to process its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Sanmina’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business needs free cash flow to repay its debts; accounting profits are not enough. Although Sanmina has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building (or erodes) that cash balance. . Over the past three years, Sanmina has recorded free cash flow totaling 87% of its EBIT, which is higher than what we normally expect. This puts him in a very strong position to pay off the debt.
In summary
We could understand if investors are concerned about Sanmina’s liabilities, but we can take comfort in the fact that she has net cash of US $ 268.1 million. The icing on the cake is that he converted 87% of that EBIT to free cash flow, bringing in US $ 277 million. So, is Sanmina’s debt a risk? It does not seem to us. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Know that Sanmina shows 1 warning sign in our investment analysis , you must know…
At the end of the day, it’s often best to focus on businesses with no 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 documents. Simply Wall St has no position in the mentioned stocks.
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