We Think JD Logistics (HKG:2618) Can Manage Its Debt With Ease

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. We note that JD Logistics, Inc. (HKG:2618) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Our free stock report includes 1 warning sign investors should be aware of before investing in JD Logistics. Read for free now.

When Is Debt A Problem?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is JD Logistics's Net Debt?

The image below, which you can click on for greater detail, shows that JD Logistics had debt of CN¥7.23b at the end of December 2024, a reduction from CN¥9.97b over a year. However, it does have CN¥39.3b in cash offsetting this, leading to net cash of CN¥32.1b.

A Look At JD Logistics' Liabilities

The latest balance sheet data shows that JD Logistics had liabilities of CN¥39.7b due within a year, and liabilities of CN¥15.2b falling due after that. Offsetting these obligations, it had cash of CN¥39.3b as well as receivables valued at CN¥16.3b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to JD Logistics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥71.3b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that JD Logistics has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for JD Logistics

Even more impressive was the fact that JD Logistics grew its EBIT by 1,070% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 two 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 we empathize with investors who find debt concerning, you should keep in mind that JD Logistics has net cash of CN¥32.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 404% of that EBIT to free cash flow, bringing in CN¥16b. So is JD Logistics's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that JD Logistics is showing 1 warning sign in our investment analysis , 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.