JOYY (NASDAQ:JOYY) Could Easily Take On More Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 JOYY Inc. (NASDAQ:JOYY) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is JOYY's Debt?

The image below, which you can click on for greater detail, shows that JOYY had debt of US$34.9m at the end of December 2024, a reduction from US$457.7m over a year. But it also has US$1.80b in cash to offset that, meaning it has US$1.77b net cash.

How Strong Is JOYY's Balance Sheet?

We can see from the most recent balance sheet that JOYY had liabilities of US$2.67b falling due within a year, and liabilities of US$93.9m due beyond that. On the other hand, it had cash of US$1.80b and US$266.9m worth of receivables due within a year. So its liabilities total US$700.6m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because JOYY is worth US$2.18b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, JOYY boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for JOYY

In addition to that, we're happy to report that JOYY has boosted its EBIT by 36%, thus reducing the spectre of future debt repayments. 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 JOYY 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. JOYY 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. Over the last three years, JOYY 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

Although JOYY's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.77b. The cherry on top was that in converted 462% of that EBIT to free cash flow, bringing in US$224m. So is JOYY's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for JOYY you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.