ZOO Digital Group (LON:ZOO) Is Carrying A Fair Bit Of Debt

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 ZOO Digital Group plc (LON:ZOO) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ZOO Digital Group

What Is ZOO Digital Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ZOO Digital Group had debt of US$4.05m, up from US$3.50m in one year. On the flip side, it has US$2.07m in cash leading to net debt of about US$1.98m.

How Healthy Is ZOO Digital Group's Balance Sheet?

We can see from the most recent balance sheet that ZOO Digital Group had liabilities of US$11.6m falling due within a year, and liabilities of US$6.79m due beyond that. On the other hand, it had cash of US$2.07m and US$9.18m worth of receivables due within a year. So its liabilities total US$7.18m more than the combination of its cash and short-term receivables.

Since publicly traded ZOO Digital Group shares are worth a total of US$54.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ZOO Digital Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ZOO Digital Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$32m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months ZOO Digital Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$1.1m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$770k into a profit. So to be blunt we do think it is risky. 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. Take risks, for example - ZOO Digital Group has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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