These 4 Measures Indicate That JD Logistics (HKG:2618) Is Using Debt Reasonably Well

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 Logistics, Inc. (HKG:2618) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for JD Logistics

How Much Debt Does JD Logistics Carry?

As you can see below, at the end of December 2023, JD Logistics had CN¥9.97b of debt, up from CN¥6.52b a year ago. Click the image for more detail. But it also has CN¥33.1b in cash to offset that, meaning it has CN¥23.1b net cash.

How Strong Is JD Logistics' Balance Sheet?

The latest balance sheet data shows that JD Logistics had liabilities of CN¥39.3b due within a year, and liabilities of CN¥18.2b falling due after that. Offsetting this, it had CN¥33.1b in cash and CN¥15.1b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.40b.

While this might seem like a lot, it is not so bad since JD Logistics has a market capitalization of CN¥43.2b, 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 Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that JD Logistics improved its EBIT from a last year's loss to a positive CN¥509m. 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 Logistics 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. JD Logistics 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 Logistics actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although JD Logistics's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥23.1b. The cherry on top was that in converted 3,215% of that EBIT to free cash flow, bringing in CN¥16b. So we don't have any problem with JD Logistics's use of debt. We'd be motivated to research the stock further if we found out that JD Logistics insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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.