Is Zovio (NASDAQ:ZVO) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Zovio Inc (NASDAQ:ZVO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zovio

How Much Debt Does Zovio Carry?

As you can see below, at the end of September 2020, Zovio had US$2.76m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$88.0m in cash, leading to a US$85.2m net cash position.

How Strong Is Zovio's Balance Sheet?

The latest balance sheet data shows that Zovio had liabilities of US$127.4m due within a year, and liabilities of US$29.4m falling due after that. On the other hand, it had cash of US$88.0m and US$48.7m worth of receivables due within a year. So it has liabilities totalling US$20.2m more than its cash and near-term receivables, combined.

Given Zovio has a market capitalization of US$135.2m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Zovio boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Zovio 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 Zovio had a loss before interest and tax, and actually shrunk its revenue by 3.8%, to US$400m. We would much prefer see growth.

So How Risky Is Zovio?

While Zovio lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$5.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Zovio that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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