Stocks with market capitalization between $2B and $10B, such as Zynga Inc. (NASDAQ:ZNGA) with a size of US$3.7b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine ZNGA’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Zynga’s financial health, so you should conduct further analysis into ZNGA here.
Does ZNGA face the risk of succumbing to its debt-load?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For Zynga, investors should not worry about its debt levels because the company has none! It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with ZNGA, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does ZNGA’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Zynga has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$303m, it appears that the company has been able to meet these obligations given the level of current assets of US$571m, with a current ratio of 1.88x. Generally, for Entertainment companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
ZNGA has zero-debt as well as ample cash to cover its near-term liabilities. Its safe operations reduces risk for the company and its investors, however, some level of debt may also ramp up earnings growth and operational efficiency. Keep in mind I haven’t considered other factors such as how ZNGA has performed in the past. I recommend you continue to research Zynga to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZNGA’s future growth? Take a look at our free research report of analyst consensus for ZNGA’s outlook.
- Valuation: What is ZNGA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ZNGA is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.