Is NetEase (HKG:9999) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that NetEase, Inc. (HKG:9999) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is NetEase's Debt?

As you can see below, NetEase had CN¥9.82b of debt at March 2025, down from CN¥25.3b a year prior. However, it does have CN¥140.1b in cash offsetting this, leading to net cash of CN¥130.3b.

How Strong Is NetEase's Balance Sheet?

According to the last reported balance sheet, NetEase had liabilities of CN¥49.1b due within 12 months, and liabilities of CN¥3.85b due beyond 12 months. On the other hand, it had cash of CN¥140.1b and CN¥6.74b worth of receivables due within a year. So it can boast CN¥93.9b more liquid assets than total liabilities.

It's good to see that NetEase has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that NetEase has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for NetEase

Also good is that NetEase grew its EBIT at 15% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if NetEase 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. While NetEase has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, NetEase actually produced more free cash flow than EBIT. 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 NetEase has CN¥130.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in CN¥40b. So is NetEase's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in NetEase, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.