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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, JD.com, Inc. (NASDAQ:JD) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for JD.com

What Is JD.com's Debt?

The chart below, which you can click on for greater detail, shows that JD.com had CN¥46.5b in debt in September 2023; about the same as the year before. But it also has CN¥242.4b in cash to offset that, meaning it has CN¥195.9b net cash.

A Look At JD.com's Liabilities

Zooming in on the latest balance sheet data, we can see that JD.com had liabilities of CN¥262.4b due within 12 months and liabilities of CN¥58.7b due beyond that. On the other hand, it had cash of CN¥242.4b and CN¥25.3b worth of receivables due within a year. So its liabilities total CN¥53.4b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because JD.com is worth a massive CN¥260.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, JD.com boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that JD.com grew its EBIT by 105% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if JD.com 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the last three years, JD.com actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While JD.com does have more liabilities than liquid assets, it also has net cash of CN¥195.9b. The cherry on top was that in converted 180% of that EBIT to free cash flow, bringing in CN¥36b. So is JD.com's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for JD.com you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.