Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 YOOZOO Interactive Co., Ltd. (SZSE:002174) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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 YOOZOO Interactive

What Is YOOZOO Interactive's Net Debt?

As you can see below, at the end of September 2023, YOOZOO Interactive had CN¥946.6m of debt, up from CN¥791.5m a year ago. Click the image for more detail. However, it does have CN¥1.44b in cash offsetting this, leading to net cash of CN¥491.9m.

How Healthy Is YOOZOO Interactive's Balance Sheet?

According to the last reported balance sheet, YOOZOO Interactive had liabilities of CN¥769.6m due within 12 months, and liabilities of CN¥706.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.44b as well as receivables valued at CN¥332.8m due within 12 months. So it actually has CN¥295.7m more liquid assets than total liabilities.

This short term liquidity is a sign that YOOZOO Interactive could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, YOOZOO Interactive boasts net cash, so it's fair to say it does not have a heavy debt load! 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 YOOZOO Interactive 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.

In the last year YOOZOO Interactive had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥1.7b. That makes us nervous, to say the least.

So How Risky Is YOOZOO Interactive?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year YOOZOO Interactive had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥436m and booked a CN¥698m accounting loss. But the saving grace is the CN¥491.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for YOOZOO Interactive you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.