Does ZEAL Network (ETR:TIMA) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that ZEAL Network SE (ETR:TIMA) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ZEAL Network

How Much Debt Does ZEAL Network Carry?

As you can see below, at the end of September 2021, ZEAL Network had €8.70m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has €133.0m in cash, leading to a €124.3m net cash position.

A Look At ZEAL Network's Liabilities

We can see from the most recent balance sheet that ZEAL Network had liabilities of €80.9m falling due within a year, and liabilities of €70.9m due beyond that. On the other hand, it had cash of €133.0m and €3.20m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €15.5m.

This state of affairs indicates that ZEAL Network's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €842.9m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, ZEAL Network boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, ZEAL Network turned things around in the last 12 months, delivering and EBIT of €14m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ZEAL Network'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ZEAL Network may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, ZEAL Network actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about ZEAL Network's liabilities, but we can be reassured by the fact it has has net cash of €124.3m. And it impressed us with free cash flow of €76m, being 539% of its EBIT. So is ZEAL Network's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for ZEAL Network 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.

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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.