Is JOYY (NASDAQ:YY) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies JOYY Inc. (NASDAQ:YY) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for JOYY

What Is JOYY's Debt?

The chart below, which you can click on for greater detail, shows that JOYY had US$875.1m in debt in March 2023; about the same as the year before. However, it does have US$3.92b in cash offsetting this, leading to net cash of US$3.05b.

How Strong Is JOYY's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JOYY had liabilities of US$3.10b due within 12 months and liabilities of US$595.0m due beyond that. Offsetting these obligations, it had cash of US$3.92b as well as receivables valued at US$121.5m due within 12 months. So it can boast US$348.6m more liquid assets than total liabilities.

It's good to see that JOYY 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 JOYY 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, JOYY turned things around in the last 12 months, delivering and EBIT of US$62m. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JOYY 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 year, JOYY actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that JOYY has net cash of US$3.05b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$247m, being 400% of its EBIT. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with JOYY (including 1 which doesn't sit too well with us) .

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.