These 4 Measures Indicate That JD Sports Fashion (LON:JD.) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies JD Sports Fashion Plc (LON:JD.) makes use of debt. But should shareholders be worried about its use of debt?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is JD Sports Fashion's Net Debt?

The image below, which you can click on for greater detail, shows that at February 2025 JD Sports Fashion had debt of UK£679.0m, up from UK£130.0m in one year. But on the other hand it also has UK£731.0m in cash, leading to a UK£52.0m net cash position.

How Strong Is JD Sports Fashion's Balance Sheet?

The latest balance sheet data shows that JD Sports Fashion had liabilities of UK£2.43b due within a year, and liabilities of UK£4.15b falling due after that. On the other hand, it had cash of UK£731.0m and UK£136.0m worth of receivables due within a year. So it has liabilities totalling UK£5.72b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's UK£4.45b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. JD Sports Fashion boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

View our latest analysis for JD Sports Fashion

And we also note warmly that JD Sports Fashion grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JD Sports Fashion 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, JD Sports Fashion recorded free cash flow worth 71% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although JD Sports Fashion's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£52.0m. And it impressed us with free cash flow of UK£713m, being 71% of its EBIT. So we don't have any problem with JD Sports Fashion's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with JD Sports Fashion , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.