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 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 YOOZOO Interactive Co., Ltd. (SZSE:002174) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for YOOZOO Interactive

What Is YOOZOO Interactive's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 YOOZOO Interactive had CN¥1.09b of debt, an increase on CN¥727.5m, over one year. However, it does have CN¥1.64b in cash offsetting this, leading to net cash of CN¥551.1m.

How Strong Is YOOZOO Interactive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that YOOZOO Interactive had liabilities of CN¥1.04b due within 12 months and liabilities of CN¥704.4m due beyond that. On the other hand, it had cash of CN¥1.64b and CN¥356.5m worth of receivables due within a year. So it can boast CN¥244.0m more liquid assets than total liabilities.

This surplus suggests that YOOZOO Interactive has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that YOOZOO Interactive has more cash than debt is arguably a good indication that it can manage its debt safely. 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 27%, to CN¥1.8b. That makes us nervous, to say the least.

So How Risky Is YOOZOO Interactive?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that YOOZOO Interactive had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥339m and booked a CN¥758m accounting loss. Given it only has net cash of CN¥551.1m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how YOOZOO Interactive's profit, revenue, and operating cashflow have changed over the last few years.

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.