Is Zscaler (NASDAQ:ZS) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Zscaler, Inc. (NASDAQ:ZS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Zscaler

What Is Zscaler's Debt?

As you can see below, Zscaler had US$1.14b of debt, at April 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$2.24b in cash offsetting this, leading to net cash of US$1.10b.

How Healthy Is Zscaler's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zscaler had liabilities of US$1.70b due within 12 months and liabilities of US$1.40b due beyond that. Offsetting these obligations, it had cash of US$2.24b as well as receivables valued at US$516.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$348.7m.

Having regard to Zscaler's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$27.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Zscaler 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 Zscaler'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.

In the last year Zscaler wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$2.0b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zscaler?

Although Zscaler had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$550m. 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. The good news for Zscaler shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zscaler you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com