Is Zillow Group (NASDAQ:ZG) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Zillow Group, Inc. (NASDAQ:ZG) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Zillow Group

How Much Debt Does Zillow Group Carry?

You can click the graphic below for the historical numbers, but it shows that Zillow Group had US$1.70b of debt in March 2023, down from US$2.53b, one year before. But on the other hand it also has US$3.37b in cash, leading to a US$1.67b net cash position.

How Strong Is Zillow Group's Balance Sheet?

According to the last reported balance sheet, Zillow Group had liabilities of US$287.0m due within 12 months, and liabilities of US$1.81b due beyond 12 months. Offsetting this, it had US$3.37b in cash and US$75.0m in receivables that were due within 12 months. So it can boast US$1.35b more liquid assets than total liabilities.

This surplus suggests that Zillow Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zillow Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 reported revenue of US$1.9b, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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$1.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 30% is a good sign. We'd see further strong growth as an optimistic indication. 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.

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.