JB Hi-Fi (ASX:JBH) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that JB Hi-Fi Limited (ASX:JBH) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 JB Hi-Fi

What Is JB Hi-Fi's Debt?

You can click the graphic below for the historical numbers, but it shows that JB Hi-Fi had AU$49.8m of debt in June 2023, down from AU$59.4m, one year before. However, its balance sheet shows it holds AU$177.3m in cash, so it actually has AU$127.5m net cash.

How Strong Is JB Hi-Fi's Balance Sheet?

The latest balance sheet data shows that JB Hi-Fi had liabilities of AU$1.18b due within a year, and liabilities of AU$630.4m falling due after that. Offsetting this, it had AU$177.3m in cash and AU$146.5m in receivables that were due within 12 months. So it has liabilities totalling AU$1.49b more than its cash and near-term receivables, combined.

JB Hi-Fi has a market capitalization of AU$5.82b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, JB Hi-Fi also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that JB Hi-Fi saw its EBIT decline by 3.5% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 JB Hi-Fi can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While JB Hi-Fi has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, JB Hi-Fi produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although JB Hi-Fi's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$127.5m. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in AU$644m. So we don't have any problem with JB Hi-Fi's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with JB Hi-Fi (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.