Is Zscaler (NASDAQ:ZS) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Zscaler, Inc. (NASDAQ:ZS) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zscaler

What Is Zscaler's Debt?

As you can see below, at the end of April 2022, Zscaler had US$954.6m of debt, up from US$900.3m a year ago. Click the image for more detail. But on the other hand it also has US$1.66b in cash, leading to a US$703.3m net cash position.

How Healthy Is Zscaler's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zscaler had liabilities of US$912.6m due within 12 months and liabilities of US$1.08b due beyond that. On the other hand, it had cash of US$1.66b and US$274.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$60.9m.

This state of affairs indicates that Zscaler's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$22.0b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Zscaler also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Zscaler reported revenue of US$970m, which is a gain of 61%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Zscaler?

While Zscaler lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$184m. 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. One positive is that Zscaler is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Zscaler is showing 4 warning signs in our investment analysis , 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.