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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. We can see that Zillow Group, Inc. (NASDAQ:ZG) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Zillow Group
What Is Zillow Group's Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Zillow Group had debt of US$2.53b, up from US$2.26b in one year. But it also has US$3.63b in cash to offset that, meaning it has US$1.09b net cash.
A Look At Zillow Group's Liabilities
The latest balance sheet data shows that Zillow Group had liabilities of US$1.20b due within a year, and liabilities of US$1.82b falling due after that. Offsetting this, it had US$3.63b in cash and US$200.0m in receivables that were due within 12 months. So it can boast US$808.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Zillow Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Zillow Group has more cash than debt is arguably a good indication that 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 Zillow Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Zillow Group reported revenue of US$11b, which is a gain of 226%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!