We Think JD.com (NASDAQ:JD) Can Manage Its Debt With Ease

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that JD.com, Inc. (NASDAQ:JD) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for JD.com

How Much Debt Does JD.com Carry?

As you can see below, at the end of March 2024, JD.com had CN¥47.9b of debt, up from CN¥43.6b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥172.0b in cash, so it actually has CN¥124.1b net cash.

How Strong Is JD.com's Balance Sheet?

According to the last reported balance sheet, JD.com had liabilities of CN¥246.1b due within 12 months, and liabilities of CN¥67.8b due beyond 12 months. On the other hand, it had cash of CN¥172.0b and CN¥21.6b worth of receivables due within a year. So its liabilities total CN¥120.3b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since JD.com has a huge market capitalization of CN¥334.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

In addition to that, we're happy to report that JD.com has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. 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.com 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, a company can only pay off debt with cold hard cash, not accounting profits. JD.com 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.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

Although JD.com'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¥124.1b. And it impressed us with free cash flow of CN¥46b, being 143% of its EBIT. So is JD.com's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that JD.com is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.