Is Zillow Group (NASDAQ:ZG) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Zillow Group

How Much Debt Does Zillow Group Carry?

The image below, which you can click on for greater detail, shows that Zillow Group had debt of US$1.71b at the end of June 2022, a reduction from US$2.59b over a year. But it also has US$3.54b in cash to offset that, meaning it has US$1.83b net cash.

How Healthy Is Zillow Group's Balance Sheet?

The latest balance sheet data shows that Zillow Group had liabilities of US$304.0m due within a year, and liabilities of US$1.81b falling due after that. Offsetting this, it had US$3.54b in cash and US$162.0m in receivables that were due within 12 months. So it can boast US$1.59b more liquid assets than total liabilities.

It's good to see that Zillow Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Zillow Group reported revenue of US$11b, which is a gain of 174%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Zillow Group?

While Zillow Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$1.1b. 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. We think its revenue growth of 174% is a good sign. We'd see further strong growth as an optimistic indication. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Zillow Group insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.