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JD Sports Fashion plc (LON:JD.): Financial Strength Analysis

Simply Wall St

Stocks with market capitalization between $2B and $10B, such as JD Sports Fashion plc (LON:JD.) with a size of UK£5.8b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine JD.’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into JD. here.

See our latest analysis for JD Sports Fashion

Does JD. Produce Much Cash Relative To Its Debt?

JD. has built up its total debt levels in the last twelve months, from UK£38m to UK£126m – this includes long-term debt. With this increase in debt, JD. currently has UK£251m remaining in cash and short-term investments to keep the business going. Moreover, JD. has produced cash from operations of UK£378m in the last twelve months, resulting in an operating cash to total debt ratio of 300%, indicating that JD.’s current level of operating cash is high enough to cover debt.

Can JD. pay its short-term liabilities?

With current liabilities at UK£901m, it seems that the business has been able to meet these obligations given the level of current assets of UK£1.2b, with a current ratio of 1.32x. The current ratio is calculated by dividing current assets by current liabilities. For Specialty Retail companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:JD. Historical Debt, April 18th 2019

Does JD. face the risk of succumbing to its debt-load?

With debt at 12% of equity, JD. may be thought of as appropriately levered. This range is considered safe as JD. is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether JD. is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In JD.'s, case, the ratio of 58x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as JD.’s high interest coverage is seen as responsible and safe practice.

Next Steps:

JD. has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how JD. has been performing in the past. You should continue to research JD Sports Fashion to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for JD.’s future growth? Take a look at our free research report of analyst consensus for JD.’s outlook.
  2. Valuation: What is JD. worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether JD. is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.