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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. Zuora, Inc. (NYSE:ZUO) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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, 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.
What Is Zuora’s Debt?
You can click the graphic below for the historical numbers, but it shows that Zuora had US$13.5m of debt in April 2019, down from US$16.1m, one year before However, its balance sheet shows it holds US$179.3m in cash, so it actually has US$165.8m net cash.
How Healthy Is Zuora’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Zuora had liabilities of US$134.2m due within 12 months and liabilities of US$14.8m due beyond that. On the other hand, it had cash of US$179.3m and US$56.7m worth of receivables due within a year. So it actually has US$87.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Zuora could probably pay off its debt with ease, as its balance sheet is far from stretched. Given that Zuora has more cash than debt, we’re pretty confident it can manage its debt safely. 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 managed to grow its revenue by 31%, to US$247m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Zuora?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Zuora had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$31m of cash and made a loss of US$80m. But the saving grace is the US$179m on the balance sheet. That kitty means the company can keep spending for growth for at least five years, at current rates. With very solid revenue growth in the last year, Zuora may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Zuora I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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