Is J Sainsbury plc Dependent On Debt?

Are debt levels at J Sainsbury plc (LON: SBRY) becoming unaffordable and detrimental to the company’s future prospects?

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On the face of it, 2013 was a disappointing year for shareholders in J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US), with shares underperforming the FTSE 100 by around 9% (the FTSE 100 gained 14%, while J Sainsbury gained 5%).

Despite this, it was another encouraging year for the company — especially when compared to its peers. Indeed, J Sainsbury has consistently been the top-performing supermarket when it comes to sales growth, share price and a clear, focused strategy. Its relatively poor share price performance could be due to it being in a sector that is struggling to generate bottom-line growth (although J Sainsbury’s growth forecasts seem encouraging).

However, could the disappointing share price returns be a result of market fears surrounding the sustainability of the business? In other words, is J Sainsbury’s level of financial risk holding shares back and, moreover, is the company dependent on debt?

Excessive Debt?

J Sainsbury’s debt to equity ratio currently stands at 49%, meaning that for every £1 of net assets (total assets less total liabilities) the company has £0.49 of debt. This is a comfortable level and does not appear to be at all excessive, with a balance seemingly being struck between maximising returns to shareholders (through the use of debt) and maintaining an acceptable level of financial risk on the balance sheet.

Indeed, further evidence of this can be seen in the company’s interest coverage ratio, which stands at a very healthy 7.2. This means that J Sainsbury was able to make its net interest payments over seven times (using operating profit) in its most recent financial year. This is a very comfortable level and highlights the fact that with a relatively stable income stream from the sale of food and clothing, J Sainsbury could afford to increase debt levels in an attempt to further improve shareholder returns.

Looking Ahead

While many of its supermarket peers struggle to post bottom-line growth, J Sainsbury is forecast to deliver earnings per share (EPS) growth of 5% per annum over the next 2 years. This is in-line with the FTSE 100 average, although despite this the company still trades on a substantial discount to the wider index. Indeed, with in-line growth forecasts, a comfortable level of debt and a price to earnings (P/E) ratio of 10.7 (versus 13.5 for the FTSE 100), J Sainsbury could have a strong 2014.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter owns shares in J Sainsbury.

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