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Zillow Group (NASDAQ:ZG) Is Using Debt Safely

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Zillow Group, Inc. (NASDAQ:ZG) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zillow Group

What Is Zillow Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Zillow Group had debt of US$2.53b, up from US$2.26b in one year. But it also has US$3.63b in cash to offset that, meaning it has US$1.09b net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Zillow Group's Liabilities

The latest balance sheet data shows that Zillow Group had liabilities of US$1.20b due within a year, and liabilities of US$1.82b falling due after that. Offsetting this, it had US$3.63b in cash and US$200.0m in receivables that were due within 12 months. So it can boast US$808.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Zillow Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zillow Group 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 Zillow Group 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.

Over 12 months, Zillow Group reported revenue of US$11b, which is a gain of 226%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Zillow Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Zillow Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$152m and booked a US$564m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$1.09b. That means it could keep spending at its current rate for more than two years. Importantly, Zillow Group's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Zillow Group that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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