David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Zscaler, Inc. (NASDAQ:ZS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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 Zscaler's Debt?

As you can see below, Zscaler had US$1.14b of debt, at April 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$2.24b in cash, so it actually has US$1.10b net cash.

How Healthy Is Zscaler's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zscaler had liabilities of US$1.70b due within 12 months and liabilities of US$1.40b due beyond that. Offsetting this, it had US$2.24b in cash and US$516.9m in receivables that were due within 12 months. So its liabilities total US$348.7m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Zscaler's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$27.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Zscaler also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Zscaler 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 Zscaler wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$2.0b. With any luck the company will be able to grow its way to profitability.

So How Risky Is Zscaler?

Although Zscaler had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$550m. 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. One positive is that Zscaler is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Zscaler you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com