JB Hi-Fi (ASX:JBH) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for JB Hi-Fi

What Is JB Hi-Fi's Net Debt?

You can click the graphic below for the historical numbers, but it shows that JB Hi-Fi had AU$15.0m of debt in June 2024, down from AU$49.8m, one year before. But on the other hand it also has AU$317.7m in cash, leading to a AU$302.7m net cash position.

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

The latest balance sheet data shows that JB Hi-Fi had liabilities of AU$1.31b due within a year, and liabilities of AU$616.7m falling due after that. Offsetting these obligations, it had cash of AU$317.7m as well as receivables valued at AU$135.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$1.47b.

Of course, JB Hi-Fi has a market capitalization of AU$8.93b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On the other hand, JB Hi-Fi's EBIT dived 16%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JB Hi-Fi 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. JB Hi-Fi 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, JB Hi-Fi recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While JB Hi-Fi does have more liabilities than liquid assets, it also has net cash of AU$302.7m. And it impressed us with free cash flow of AU$678m, being 86% of its EBIT. 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 , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.