Is JD.com (NASDAQ:JD) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that JD.com, Inc. (NASDAQ:JD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for JD.com

What Is JD.com's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 JD.com had debt of CN¥15.8b, up from CN¥10.1b in one year. But it also has CN¥146.7b in cash to offset that, meaning it has CN¥130.9b net cash.

How Strong Is JD.com's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JD.com had liabilities of CN¥174.0b due within 12 months and liabilities of CN¥26.7b due beyond that. Offsetting this, it had CN¥146.7b in cash and CN¥14.5b in receivables that were due within 12 months. So its liabilities total CN¥39.5b more than the combination of its cash and short-term receivables.

Of course, JD.com has a titanic market capitalization of CN¥677.3b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, JD.com boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, JD.com grew its EBIT by 109% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine JD.com'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While JD.com 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.com actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about JD.com's liabilities, but we can be reassured by the fact it has has net cash of CN¥130.9b. The cherry on top was that in converted 290% of that EBIT to free cash flow, bringing in CN¥30b. So we don't think JD.com's use of debt is risky. 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. For example JD.com has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.

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. 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.
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