JD Sports Fashion (LON:JD.) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies JD Sports Fashion plc (LON:JD.) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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.

Check out the opportunities and risks within the GB Specialty Retail industry.

How Much Debt Does JD Sports Fashion Carry?

You can click the graphic below for the historical numbers, but it shows that JD Sports Fashion had UK£124.8m of debt in July 2022, down from UK£309.6m, one year before. However, its balance sheet shows it holds UK£1.14b in cash, so it actually has UK£1.01b net cash.

How Strong Is JD Sports Fashion's Balance Sheet?

The latest balance sheet data shows that JD Sports Fashion had liabilities of UK£2.04b due within a year, and liabilities of UK£3.01b falling due after that. Offsetting this, it had UK£1.14b in cash and UK£314.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£3.60b.

This is a mountain of leverage relative to its market capitalization of UK£4.60b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, JD Sports Fashion boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that JD Sports Fashion grew its EBIT by 12% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine JD Sports Fashion's ability to maintain a healthy balance sheet going forward. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While JD Sports Fashion 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. Happily for any shareholders, JD Sports Fashion actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While JD Sports Fashion does have more liabilities than liquid assets, it also has net cash of UK£1.01b. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in UK£592m. So we don't have any problem with JD Sports Fashion's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for JD Sports Fashion you should know about.

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.