Zynga (NASDAQ: ZNGA) has debt but no profit; Should we be worried?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk that worries me … and every investor practices that I know worries “. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Zynga Inc. (NASDAQ: ZNGA) uses debt. But does this debt worry shareholders?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for Zynga
How much debt does Zynga have?
As you can see below, at the end of March 2021, Zynga was in debt of $ 1.30 billion, up from $ 576.7 million a year ago. Click on the image for more details. However, his balance sheet shows that he holds $ 1.36 billion in cash, so he actually has $ 58.6 million in net cash.
Is Zynga’s Track Record Healthy?
We can see from the most recent balance sheet that Zynga had liabilities of US $ 1.42 billion maturing within one year and liabilities of US $ 1.64 billion maturing beyond that. In compensation for these obligations, he had cash of US $ 1.36 billion as well as receivables valued at US $ 274.6 million maturing within 12 months. It therefore has liabilities totaling US $ 1.43 billion more than its cash and short-term receivables combined.
Of course, Zynga has a titanic market cap of $ 11.9 billion, so those liabilities are likely manageable. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite her notable liabilities, Zynga has a net cash flow, so it’s fair to say that she doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But it’s future profits, more than anything, that will determine Zynga’s ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Last year, Zynga was not profitable on EBIT level, but managed to increase its revenue by 54%, to $ 2.3 billion. Hopefully the business will be able to move towards profitability.
So how risky is Zynga?
Although Zynga recorded a loss of earnings before interest and taxes (EBIT) over the past twelve months, it generated positive free cash flow of US $ 282 million. So taking this at face value and considering the net cash position, we don’t think the security is too risky in the short term. The good news for Zynga shareholders is that its top line growth is strong, making it easier to raise capital when needed. But we still think it’s a bit risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 1 warning sign we spotted with Zynga.
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-flow-growing stocks today.
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