Is Bilibili (NASDAQ:BILI) Using Debt In A Risky Way?

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. As with many other companies Bilibili Inc. (NASDAQ:BILI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bilibili

How Much Debt Does Bilibili Carry?

As you can see below, at the end of June 2022, Bilibili had CN¥18.4b of debt, up from CN¥8.56b a year ago. Click the image for more detail. However, it does have CN¥24.9b in cash offsetting this, leading to net cash of CN¥6.55b.

How Healthy Is Bilibili's Balance Sheet?

The latest balance sheet data shows that Bilibili had liabilities of CN¥13.0b due within a year, and liabilities of CN¥17.6b falling due after that. Offsetting these obligations, it had cash of CN¥24.9b as well as receivables valued at CN¥1.43b due within 12 months. So it has liabilities totalling CN¥4.21b more than its cash and near-term receivables, combined.

Since publicly traded Bilibili shares are worth a total of CN¥45.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Bilibili boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Bilibili can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Bilibili reported revenue of CN¥21b, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Bilibili?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Bilibili had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥6.3b of cash and made a loss of CN¥9.1b. While this does make the company a bit risky, it's important to remember it has net cash of CN¥6.55b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Bilibili may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Bilibili that you should be aware of.

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.