Stock Analysis

We Think JD Sports Fashion (LON:JD.) Can Stay On Top Of Its Debt

LSE:JD.
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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.' 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. We can see that JD Sports Fashion Plc (LON:JD.) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for JD Sports Fashion

How Much Debt Does JD Sports Fashion Carry?

The image below, which you can click on for greater detail, shows that JD Sports Fashion had debt of UK£113.2m at the end of January 2023, a reduction from UK£128.1m over a year. But it also has UK£1.58b in cash to offset that, meaning it has UK£1.47b net cash.

debt-equity-history-analysis
LSE:JD. Debt to Equity History June 21st 2023

A Look At JD Sports Fashion's Liabilities

We can see from the most recent balance sheet that JD Sports Fashion had liabilities of UK£2.16b falling due within a year, and liabilities of UK£3.23b due beyond that. On the other hand, it had cash of UK£1.58b and UK£124.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£3.68b.

While this might seem like a lot, it is not so bad since JD Sports Fashion has a market capitalization of UK£7.63b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, JD Sports Fashion boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that JD Sports Fashion has increased its EBIT by 3.7% over twelve months, which should ease any concerns about debt repayment. 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 Sports Fashion 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. JD Sports Fashion 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. 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 generation warms our hearts like a puppy in a bumblebee suit.

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£1.47b. The cherry on top was that in converted 106% of that EBIT to free cash flow, bringing in UK£741m. So we don't have any problem with JD Sports Fashion's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. 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.

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.

About LSE:JD.

JD Sports Fashion

Engages in the retail of branded sports fashion and outdoor clothing, footwear, accessories, and equipment for kids, women, and men in the United Kingdom, Republic of Ireland, Europe, North America, and internationally.

Reasonable growth potential with proven track record.