How Financially Strong Is Zuora Inc (NYSE:ZUO)?

Investors are always looking for growth in small-cap stocks like Zuora Inc (NYSE:ZUO), with a market cap of US$1.9b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Software industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into ZUO here.

How much cash does ZUO generate through its operations?

Over the past year, ZUO has ramped up its debt from US$3m to US$18m , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$180m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of ZUO’s operating efficiency ratios such as ROA here.

Does ZUO’s liquid assets cover its short-term commitments?

At the current liabilities level of US$114m liabilities, the company has been able to meet these obligations given the level of current assets of US$232m, with a current ratio of 2.03x. For Software companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Can ZUO service its debt comfortably?

With a debt-to-equity ratio of 11%, ZUO's debt level may be seen as prudent. This range is considered safe as ZUO is not taking on too much debt obligation, which may be constraining for future growth. Investors' risk associated with debt is very low with ZUO, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

Although ZUO’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how ZUO has been performing in the past. I recommend you continue to research Zuora to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for ZUO’s future growth? Take a look at our free research report of analyst consensus for ZUO’s outlook.
2. Historical Performance: What has ZUO's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.