Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Zuora, Inc. (NYSE:ZUO) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

What Is Zuora's Debt?

The image below, which you can click on for greater detail, shows that at October 2023 Zuora had debt of US$356.6m, up from US$208.4m in one year. However, its balance sheet shows it holds US$494.6m in cash, so it actually has US$137.9m net cash.

How Healthy Is Zuora's Balance Sheet?

The latest balance sheet data shows that Zuora had liabilities of US$225.1m due within a year, and liabilities of US$407.5m falling due after that. On the other hand, it had cash of US$494.6m and US$81.3m worth of receivables due within a year. So its liabilities total US$56.7m more than the combination of its cash and short-term receivables.

Since publicly traded Zuora shares are worth a total of US$1.24b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Zuora boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Zuora reported revenue of US$424m, which is a gain of 11%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Zuora?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Zuora had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$63m and booked a US$155m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$137.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Zuora , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.