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.' 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. Importantly, JD Sports Fashion plc (LON:JD.) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for JD Sports Fashion

What Is JD Sports Fashion's Debt?

The image below, which you can click on for greater detail, shows that at August 2020 JD Sports Fashion had debt of UK£313.2m, up from UK£228.5m in one year. However, its balance sheet shows it holds UK£1.08b in cash, so it actually has UK£764.9m net cash.

How Strong Is JD Sports Fashion's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JD Sports Fashion had liabilities of UK£1.72b due within 12 months and liabilities of UK£1.69b due beyond that. Offsetting these obligations, it had cash of UK£1.08b as well as receivables valued at UK£193.8m due within 12 months. So it has liabilities totalling UK£2.14b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since JD Sports Fashion has a huge market capitalization of UK£8.32b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, JD Sports Fashion boasts net cash, so it's fair to say it does not have a heavy debt load!

Unfortunately, JD Sports Fashion saw its EBIT slide 3.9% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.