Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Zuora, Inc. (NYSE:ZUO) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Zuora Carry?
You can click the graphic below for the historical numbers, but it shows that Zuora had US$8.32m of debt in July 2020, down from US$12.7m, one year before. However, its balance sheet shows it holds US$179.2m in cash, so it actually has US$170.9m net cash.
How Strong Is Zuora's Balance Sheet?
We can see from the most recent balance sheet that Zuora had liabilities of US$152.1m falling due within a year, and liabilities of US$65.0m due beyond that. Offsetting this, it had US$179.2m in cash and US$51.5m in receivables that were due within 12 months. So it can boast US$13.6m more liquid assets than total liabilities.
Having regard to Zuora's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.20b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Zuora 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 it is future earnings, more than anything, that will determine Zuora's ability to maintain a healthy balance sheet going forward. 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 Zuora wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$291m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Zuora?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Zuora lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$13m and booked a US$80m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$170.9m. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Zuora that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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