Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Zillow Group, Inc. (NASDAQ:ZG) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Zillow Group's Net Debt?

The image below, which you can click on for greater detail, shows that Zillow Group had debt of US$1.06b at the end of September 2024, a reduction from US$1.76b over a year. But on the other hand it also has US$2.18b in cash, leading to a US$1.12b net cash position.

How Strong Is Zillow Group's Balance Sheet?

According to the last reported balance sheet, Zillow Group had liabilities of US$854.0m due within 12 months, and liabilities of US$649.0m due beyond 12 months. On the other hand, it had cash of US$2.18b and US$117.0m worth of receivables due within a year. So it actually has US$793.0m more liquid assets than total liabilities.

This surplus suggests that Zillow Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Zillow Group 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 ultimately the future profitability of the business will decide if Zillow Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Zillow Group wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$2.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Zillow Group?

Although Zillow Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$222m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Zillow Group I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.