The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Zeta Global Holdings Corp. (NYSE:ZETA) makes use of debt. But the real question is whether this debt is making the company risky.
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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Zeta Global Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2024 Zeta Global Holdings had US$196.1m of debt, an increase on US$184.0m, over one year. But it also has US$418.5m in cash to offset that, meaning it has US$222.4m net cash.
How Healthy Is Zeta Global Holdings' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Zeta Global Holdings had liabilities of US$190.9m due within 12 months and liabilities of US$203.3m due beyond that. On the other hand, it had cash of US$418.5m and US$203.7m worth of receivables due within a year. So it can boast US$228.0m more liquid assets than total liabilities.
This surplus suggests that Zeta Global Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Zeta Global Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zeta Global Holdings'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, Zeta Global Holdings reported revenue of US$901m, which is a gain of 30%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Zeta Global Holdings?
While Zeta Global Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$79m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 30% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. We've identified 2 warning signs with Zeta Global Holdings , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
