JD Sports Fashion (LON:JD.) Takes On Some Risk With Its Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Sports Fashion Plc (LON:JD.) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is JD Sports Fashion's Debt?

You can click the graphic below for the historical numbers, but it shows that JD Sports Fashion had UK£656.0m of debt in August 2025, down from UK£905.6m, one year before. However, it also had UK£531.0m in cash, and so its net debt is UK£125.0m.

A Look At JD Sports Fashion's Liabilities

We can see from the most recent balance sheet that JD Sports Fashion had liabilities of UK£2.51b falling due within a year, and liabilities of UK£4.37b due beyond that. On the other hand, it had cash of UK£531.0m and UK£501.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£5.85b.

Given this deficit is actually higher than the company's market capitalization of UK£4.18b, we think shareholders really should watch JD Sports Fashion's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

See our latest analysis for JD Sports Fashion

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt at just 0.085 times EBITDA, it seems JD Sports Fashion only uses a little bit of leverage. Although with EBIT only covering interest expenses 5.0 times over, the company is truly paying for borrowing. JD Sports Fashion grew its EBIT by 6.6% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine JD Sports Fashion's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, JD Sports Fashion produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

While JD Sports Fashion's level of total liabilities has us nervous. For example, its net debt to EBITDA and conversion of EBIT to free cash flow give us some confidence in its ability to manage its debt. We think that JD Sports Fashion's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. Over time, share prices tend to follow earnings per share, so if you're interested in JD Sports Fashion, you may well want to click here to check an interactive graph of its earnings per share history.

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.