Does Sysco (NYSE:SYY) have a healthy balance sheet?

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We notice that Sysco Corporation (NYSE:SYY) has debt on its balance sheet. But does this debt worry shareholders?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

What is Sysco’s net debt?

The image below, which you can click on for more details, shows that Sysco had US$11.1 billion in debt at the end of October 2021, a reduction from US$13.7 billion year-on-year . However, he has $2.07 billion in cash to offset this, resulting in a net debt of approximately $9.08 billion.

NYSE: SYY Debt to Equity History February 2, 2022

A look at Sysco’s responsibilities

The latest balance sheet data shows that Sysco had liabilities of US$7.74 billion due within one year, and liabilities of US$12.7 billion falling due thereafter. In return, he had $2.07 billion in cash and $4.31 billion in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $14.0 billion.

While that might sound like a lot, it’s not too bad since Sysco has a huge market capitalization of US$40.7 billion, so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay debt.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

While Sysco’s debt to EBITDA ratio (3.5) suggests it uses some debt, its interest coverage is very low at 2.1, suggesting high leverage. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. The good news is that Sysco has grown its EBIT smoothly by 37% over the past twelve months. Like a mother’s loving embrace of a newborn, this kind of growth builds resilience, putting the company in a stronger position to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But future earnings, more than anything, will determine Sysco’s ability to maintain a healthy balance sheet in the future. So if you want to see what the pros think, you might find this free analyst earnings forecast report Be interesting.

But our last consideration is also important, because a company cannot pay off its debts with paper profits; he needs cash. It is therefore worth checking how much of this EBIT is supported by free cash flow. Over the past three years, Sysco has recorded free cash flow of 66% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

According to our analysis, Sysco’s EBIT growth rate should indicate that it won’t have too many problems with its debt. However, our other observations were not so encouraging. To be precise, he seems about as good at covering his interest costs with his EBIT as wet socks are at keeping your feet warm. When considering all of the items mentioned above, it seems to us that Sysco is managing its debt pretty well. But be warned: we believe debt levels are high enough to warrant continued monitoring. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that Sysco watch 2 warning signs in our investment analysis and 1 of them is a little unpleasant…

If after all this you are more interested in a fast growing company with a strong balance sheet, then check out our list of net cash growth stocks without delay.

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