Is YOOZOO Interactive (SZSE:002174) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for YOOZOO Interactive

What Is YOOZOO Interactive's Debt?

The image below, which you can click on for greater detail, shows that YOOZOO Interactive had debt of CN¥992.6m at the end of March 2024, a reduction from CN¥1.05b over a year. But it also has CN¥1.61b in cash to offset that, meaning it has CN¥622.2m net cash.

A Look At YOOZOO Interactive's Liabilities

The latest balance sheet data shows that YOOZOO Interactive had liabilities of CN¥751.9m due within a year, and liabilities of CN¥706.6m falling due after that. Offsetting these obligations, it had cash of CN¥1.61b as well as receivables valued at CN¥275.3m due within 12 months. So it actually has CN¥431.6m 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. Simply put, the fact that YOOZOO Interactive has more cash than debt is arguably a good indication that it can manage its debt safely.

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¥142m. 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 YOOZOO Interactive can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last year, YOOZOO Interactive burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case YOOZOO Interactive has CN¥622.2m in net cash and a decent-looking balance sheet. So we are not troubled with YOOZOO Interactive's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with YOOZOO Interactive .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.