Zscaler (NASDAQ:ZS) Has Debt But No Earnings; Should You Worry?

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.' 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 note that Zscaler, Inc. (NASDAQ:ZS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Zscaler

How Much Debt Does Zscaler Carry?

The chart below, which you can click on for greater detail, shows that Zscaler had US$1.14b in debt in October 2023; about the same as the year before. However, it does have US$2.32b in cash offsetting this, leading to net cash of US$1.18b.

How Healthy Is Zscaler's Balance Sheet?

According to the last reported balance sheet, Zscaler had liabilities of US$1.47b due within 12 months, and liabilities of US$1.35b due beyond 12 months. Offsetting this, it had US$2.32b in cash and US$376.3m in receivables that were due within 12 months. So its liabilities total US$127.3m more than the combination of its cash and short-term receivables.

Having regard to Zscaler's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$36.0b 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Zscaler can strengthen its balance sheet over time. 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, Zscaler reported revenue of US$1.8b, which is a gain of 45%, 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$463m. 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. 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. 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. Case in point: We've spotted 3 warning signs for Zscaler you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.