Is Zuora (NYSE:ZUO) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Zuora, Inc. (NYSE:ZUO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zuora

What Is Zuora's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of October 2022 Zuora had US$208.4m of debt, an increase on US$2.75m, over one year. But it also has US$401.8m in cash to offset that, meaning it has US$193.4m net cash.

A Look At Zuora's Liabilities

The latest balance sheet data shows that Zuora had liabilities of US$228.4m due within a year, and liabilities of US$253.9m falling due after that. Offsetting these obligations, it had cash of US$401.8m as well as receivables valued at US$78.0m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Zuora's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.23b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Zuora 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 it is future earnings, more than anything, that will determine Zuora'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.

Over 12 months, Zuora reported revenue of US$384m, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Zuora?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Zuora lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$3.5m and booked a US$125m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$193.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 2 warning signs for Zuora that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.