JOYY (NASDAQ:YY) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, JOYY Inc. (NASDAQ:YY) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 JOYY had US$1.09b of debt, an increase on US$785.3m, over one year. However, its balance sheet shows it holds US$4.85b in cash, so it actually has US$3.77b net cash.

How Strong Is JOYY's Balance Sheet?

According to the last reported balance sheet, JOYY had liabilities of US$2.67b due within 12 months, and liabilities of US$1.11b due beyond 12 months. Offsetting this, it had US$4.85b in cash and US$161.8m in receivables that were due within 12 months. So it can boast US$1.23b more liquid assets than total liabilities.

This surplus liquidity suggests that JOYY's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, JOYY 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 it is future earnings, more than anything, that will determine JOYY's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year JOYY wasn't profitable at an EBIT level, but managed to grow its revenue by 323%, to US$2.3b. That's virtually the hole-in-one of revenue growth!

So How Risky Is JOYY?

Although JOYY had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$363m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 323% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for JOYY that you should be aware of before investing here.

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. 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.
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