Does YOOZOO Interactive (SZSE:002174) Have A Healthy Balance Sheet?

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. We note that YOOZOO Interactive Co., Ltd. (SZSE:002174) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for YOOZOO Interactive

What Is YOOZOO Interactive's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 YOOZOO Interactive had CN¥1.24b of debt, an increase on CN¥946.6m, over one year. However, it does have CN¥1.81b in cash offsetting this, leading to net cash of CN¥571.0m.

How Strong Is YOOZOO Interactive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YOOZOO Interactive had liabilities of CN¥882.5m due within 12 months and liabilities of CN¥816.9m due beyond that. Offsetting these obligations, it had cash of CN¥1.81b as well as receivables valued at CN¥269.8m due within 12 months. So it actually has CN¥382.2m more liquid assets than total liabilities.

This surplus suggests that YOOZOO Interactive has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, YOOZOO Interactive boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, YOOZOO Interactive turned things around in the last 12 months, delivering and EBIT of CN¥186m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine YOOZOO Interactive'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. YOOZOO Interactive 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, YOOZOO Interactive actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case YOOZOO Interactive has CN¥571.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in CN¥207m. So is YOOZOO Interactive's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for YOOZOO Interactive that you should be aware of.

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.