Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” 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. Above all, Zendesk, Inc. (NYSE: ZEN) is in debt. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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 look at debt levels, we first consider both liquidity and debt levels.
How much debt does Zendesk have?
You can click on the graph below for historical numbers, but it shows that as of September 2021, Zendesk was in debt of $ 1.11 billion, an increase from $ 1.06 billion, over a year. However, given that it has a cash reserve of US $ 953.8 million, its net debt is less, at around US $ 152.2 million.
NYSE: ZEN Debt to Equity History November 30, 2021
How strong is Zendesk’s balance sheet?
The latest balance sheet data shows that Zendesk had liabilities of US $ 809.7 million due within one year, and liabilities of US $ 1.04 billion due thereafter. In return, he had $ 953.8 million in cash and $ 187.5 million in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 711.7 million.
Of course, Zendesk has a titanic market cap of $ 11.4 billion, so those liabilities are likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. With virtually no net debt, Zendesk is indeed very little in debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Zendesk can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year over year, Zendesk reported revenue of US $ 1.2 billion, a gain of 28%, although it reported no profit before interest and taxes. The shareholders are probably keeping their fingers crossed that this could generate a profit.
While we can certainly appreciate Zendesk’s revenue growth, its earnings before interest and taxes (EBIT) are not ideal. Indeed, it lost 156 million US dollars in EBIT. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. Quite frankly, we think the record is far from up to par, although it could improve over time. For example, we wouldn’t want to see a repeat of last year’s $ 232 million loss. So we think this title is quite risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Zendesk displays 3 warning signs in our investment analysis , you must know…
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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