Zillow Group (NASDAQ:ZG) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Zillow Group, Inc. (NASDAQ:ZG) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out our latest analysis for Zillow Group

What Is Zillow Group's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Zillow Group had debt of US$1.70b, up from US$1.43b in one year. But on the other hand it also has US$3.36b in cash, leading to a US$1.67b net cash position.

A Look At Zillow Group's Liabilities

The latest balance sheet data shows that Zillow Group had liabilities of US$270.0m due within a year, and liabilities of US$1.81b falling due after that. On the other hand, it had cash of US$3.36b and US$72.0m worth of receivables due within a year. So it actually has US$1.35b more liquid assets than total liabilities.

This short term liquidity is a sign that Zillow Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Zillow Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zillow Group'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.

Over 12 months, Zillow Group made a loss at the EBIT level, and saw its revenue drop to US$2.0b, which is a fall of 8.2%. We would much prefer see growth.

So How Risky Is Zillow Group?

Although Zillow Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$4.4b. 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 mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Zillow Group's profit, revenue, and operating cashflow have changed over the last few years.

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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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.