JD.com (NASDAQ:JD) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies JD.com, Inc. (NASDAQ:JD) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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.com

What Is JD.com's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 JD.com had CN¥32.8b of debt, an increase on CN¥16.9b, over one year. But on the other hand it also has CN¥180.6b in cash, leading to a CN¥147.8b net cash position.

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¥219.0b due within 12 months and liabilities of CN¥37.3b due beyond that. Offsetting these obligations, it had cash of CN¥180.6b as well as receivables valued at CN¥16.5b due within 12 months. So its liabilities total CN¥59.3b more than the combination of its cash and short-term receivables.

Of course, JD.com has a titanic market capitalization of CN¥646.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, JD.com also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for JD.com if management cannot prevent a repeat of the 58% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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, 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 three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that JD.com has CN¥147.8b in net cash. The cherry on top was that in converted 275% of that EBIT to free cash flow, bringing in CN¥22b. So we are not troubled with JD.com's debt use. Even though JD.com lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

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.