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What does Zendesk, Inc.'s (NYSE:ZEN) Balance Sheet Tell Us About Its Future?

Simply Wall St

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Zendesk, Inc. (NYSE:ZEN) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Zendesk’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ZEN here.

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See our latest analysis for Zendesk

ZEN’s Debt (And Cash Flows)

Over the past year, ZEN has ramped up its debt from US$440m to US$579m , which accounts for long term debt. With this growth in debt, ZEN currently has US$444m remaining in cash and short-term investments to keep the business going. On top of this, ZEN has generated US$81m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 14%, signalling that ZEN’s debt is not covered by operating cash.

Can ZEN meet its short-term obligations with the cash in hand?

With current liabilities at US$390m, it appears that the company has been able to meet these obligations given the level of current assets of US$600m, with a current ratio of 1.54x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Software companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:ZEN Historical Debt, May 22nd 2019

Does ZEN face the risk of succumbing to its debt-load?

Zendesk is a highly levered company given that total debt exceeds equity. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. But since ZEN is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

ZEN’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how ZEN has been performing in the past. I suggest you continue to research Zendesk to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ZEN’s future growth? Take a look at our free research report of analyst consensus for ZEN’s outlook.
  2. Valuation: What is ZEN 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 ZEN 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.