ZOO Digital Group (LON:ZOO) Has A Somewhat Strained Balance Sheet

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. Importantly, ZOO Digital Group plc (LON:ZOO) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ZOO Digital Group

How Much Debt Does ZOO Digital Group Carry?

You can click the graphic below for the historical numbers, but it shows that ZOO Digital Group had US$4.86m of debt in September 2021, down from US$7.41m, one year before. However, it does have US$8.21m in cash offsetting this, leading to net cash of US$3.35m.

How Strong Is ZOO Digital Group's Balance Sheet?

According to the last reported balance sheet, ZOO Digital Group had liabilities of US$13.5m due within 12 months, and liabilities of US$3.09m due beyond 12 months. On the other hand, it had cash of US$8.21m and US$14.6m worth of receivables due within a year. So it can boast US$6.21m more liquid assets than total liabilities.

This short term liquidity is a sign that ZOO Digital Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ZOO Digital Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, ZOO Digital Group made a loss at the EBIT level, last year, but improved that to positive EBIT of US$1.4m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ZOO Digital Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ZOO Digital Group 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. Over the last year, ZOO Digital Group saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ZOO Digital Group has net cash of US$3.35m, as well as more liquid assets than liabilities. So while ZOO Digital Group does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with ZOO Digital Group , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.