Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Zscaler, Inc. (NASDAQ:ZS) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Zscaler Carry?
The image below, which you can click on for greater detail, shows that at July 2020 Zscaler had debt of US$861.6m, up from none in one year. However, its balance sheet shows it holds US$1.37b in cash, so it actually has US$509.0m net cash.
A Look At Zscaler's Liabilities
We can see from the most recent balance sheet that Zscaler had liabilities of US$423.9m falling due within a year, and liabilities of US$924.7m due beyond that. Offsetting these obligations, it had cash of US$1.37b as well as receivables valued at US$147.6m due within 12 months. So it actually has US$169.5m more liquid assets than total liabilities.
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$20.5b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Zscaler boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.
In the last year Zscaler wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to US$431m. With any luck the company will be able to grow its way to profitability.
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$28m. 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 42% is a good sign. We'd see further strong growth as an optimistic indication. 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. To that end, you should be aware of the 4 warning signs we've spotted with Zscaler .
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you decide to trade Zscaler, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.com.