Zuora (NYSE: ZUO) has debt but no profit; Should we be worried?

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Zuora, Inc. (NYSE: ZUO) uses debt. But does this debt worry shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for Zuora

How much debt does Zuora have?

The image below, which you can click for more details, shows that Zuora had a debt of US $ 2.75 million at the end of October 2021, a reduction from US $ 7.22 million on a year. However, it has US $ 203.3 million in cash offsetting this, which leads to a net cash position of US $ 200.6 million.

NYSE: ZUO History of Debt to Equity December 6, 2021

A look at Zuora’s responsibilities

According to the latest published balance sheet, Zuora had a liability of US $ 195.2 million due within 12 months and a liability of US $ 54.3 million due beyond 12 months. In return, he had $ 203.3 million in cash and $ 72.4 million in receivables due within 12 months. He can therefore avail himself of $ 26.2 million in liquid assets more than total Liabilities.

This fact indicates that Zuora’s balance sheet looks quite strong, as its total liabilities roughly equal its liquid assets. So the $ 2.38 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. In short, Zuora has a net cash flow, so it’s fair to say that she doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But it’s future profits, 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 Analyst Profit Forecast report interesting.

Year over 12 months, Zuora reported revenue of US $ 335 million, a gain of 13%, although it reported no profit before interest and taxes. This growth rate is a bit slow for our tastes, but it takes all types to make a world.

So how risky is Zuora?

Although Zuora recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of US $ 3.0 million. So, although it is in deficit, it does not appear to have too much short-term balance sheet risk, given the net cash position. With poor income growth over the past year, we do not find the investment opportunity particularly attractive. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To this end, you need to know the 2 warning signs we spotted with Zuora.

At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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