Yahoo Finance JD.com (NASDAQ:JD) Has A Rock Solid Balance Sheet
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, JD.com, Inc. (NASDAQ:JD) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for JD.com
How Much Debt Does JD.com Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2024 JD.com had CN¥47.9b of debt, an increase on CN¥43.6b, over one year. However, it does have CN¥172.0b in cash offsetting this, leading to net cash of CN¥124.1b.
A Look At JD.com's Liabilities
According to the last reported balance sheet, JD.com had liabilities of CN¥246.1b due within 12 months, and liabilities of CN¥67.8b due beyond 12 months. Offsetting this, it had CN¥172.0b in cash and CN¥21.6b in receivables that were due within 12 months. So it has liabilities totalling CN¥120.3b more than its cash and near-term receivables, combined.
This deficit isn't so bad because JD.com is worth a massive CN¥275.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, JD.com also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that JD.com has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if JD.com can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. JD.com may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, JD.com actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
Although JD.com's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥124.1b. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in CN¥46b. So we don't think JD.com's use of debt is risky. 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 - JD.com has 1 warning sign we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
