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Is YY Inc (NASDAQ:YY) As Strong As Its Balance Sheet Indicates?

Mid-caps stocks, like YY Inc (NASDAQ:YY) with a market capitalization of US$4.80b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at YY’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of YY’s financial health, so you should conduct further analysis into YY here.

View our latest analysis for YY

How much cash does YY generate through its operations?

YY has built up its total debt levels in the last twelve months, from CN¥616.5m to CN¥720.1m , which comprises of short- and long-term debt. With this rise in debt, YY’s cash and short-term investments stands at CN¥13.75b for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of YY’s operating efficiency ratios such as ROA here.

Does YY’s liquid assets cover its short-term commitments?

At the current liabilities level of CN¥3.42b liabilities, the company has been able to meet these commitments with a current assets level of CN¥15.32b, leading to a 4.48x current account ratio. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue YY could be holding too much capital in a low-return investment environment.

NasdaqGS:YY Historical Debt September 28th 18

Can YY service its debt comfortably?

With a debt-to-equity ratio of 3.7%, YY’s debt level is relatively low. This range is considered safe as YY is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether YY is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In YY’s, case, the ratio of 17.79x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving YY ample headroom to grow its debt facilities.

Next Steps:

Although YY’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how YY has been performing in the past. You should continue to research YY to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for YY’s future growth? Take a look at our free research report of analyst consensus for YY’s outlook.
  2. Valuation: What is YY worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether YY is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.