Rather than worrying about stock volatility, Howard Marks said, “The potential for permanent loss is the risk that worries me…and every real investor I know worries.” I am.” When considering a company’s risks, it makes sense to consider a company’s balance sheet, as the failure of a business often results in liabilities.we can see it Zalando SE (ETR:ZAL) uses debt in its business. But the bigger question is how much risk does that liability create?
What are the risks of borrowing?
Debt helps a business until it struggles to pay it back with either new capital or free cash flow. But the more common (but still painful) scenario is that shareholders are permanently diluted as they have to raise new capital at a lower price. Of course, many companies are using debt to fund their growth, but that doesn’t hurt. The first step in considering a company’s debt level is to look at cash and debt together.
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How much debt does Zalando have?
The chart below, which you can click to learn more about, shows that in September 2022 Zalando had a debt of €911.4 million. almost the same as the previous year. However, offsetting this, he has €1.55 billion in cash, giving him €638 million in net cash.
How healthy is Zalando’s balance sheet?
The latest balance sheet shows that Zalando has a debt of €3.49 billion, which is due within a year and a debt of €1.75 billion to be paid after that time. Offsetting this was his €1.55 billion in cash and his €726.2 million accounts receivable due within 12 months. Liabilities therefore exceed the sum of cash and (short-term) receivables by €2.96 billion.
Zalando has a market capitalization of €8.39 billion, so it is very likely that it will be able to raise cash to improve its balance sheet if needed. But I’d like to be on the lookout for signs that debt poses too much risk. Despite his notable debt, Zalando boasts a net amount of cash, so it’s safe to say he doesn’t have a lot of debt.
Shareholders should be aware that Zalando’s EBIT fell by 66% last year. If this earnings trend continues, paying off debt will become as easy as taking a cat on a roller coaster. Clearly, the balance sheet is the starting point when analyzing debt levels. However, it is future earnings that will determine Zalando’s ability to maintain a healthy balance sheet going forward. So, if you want to know what the experts think, this free report on analyst profit forecasts might be of interest to you.
But a final consideration is also important. Because a company cannot pay its debts with paper profits. I need cash. Zalando has net cash on its balance sheet, but it’s worth noting its ability to convert interest and earnings before tax (EBIT) into free cash flow. Looking at his most recent three-year period, Zalando posted free cash flow at his 33% of his EBIT, which is lower than expected. When it comes to paying off debt, it’s not great.
Zalando has more liabilities than liquid assets, but also has net cash of €638 million. Despite the cash, I’m not particularly happy with this stock because Zalando’s EBIT growth is worrisome. The balance sheet is clearly an area to focus on when analyzing liabilities. However, not all investment risks are on the balance sheet, far from it. for example, Two warning signs in Zalande What you should know.
After all, if you’re interested in a fast-growing company with a solid balance sheet, check out our list of net cash growth stocks right away.
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