The Zip Co Ltd (ASX: Z1P) share price has certainly plummeted. It's down 70% in 2022. The last 12 months show an 87% decline for the Zip share price. But could the buy now, pay later ASX share ever go to zero?
There have been a few high-profile corporate downfalls in Australia over the years.
ABC Learning was a childcare operator that was worth $2.6 billion but collapsed after taking on far too much debt through acquisitions.
The shareholders of Virgin Australia didn't get anything as the company entered administration as a casualty of the COVID-19 pandemic. An independent expert concluded that the equity of Virgin Australia had nil value.
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What happens to a business that can't operate anymore?
Businesses that go broke often have a large pile of debt that the company can no longer afford. It's true that businesses go broke all the time. But ASX shares going broke can be particularly high profile. Shareholders are often at the bottom of the list of who will get money when businesses close. Creditors usually get paid first, with secured creditors at the front of the queue.
Companies don't necessarily get wound up straight away. There is an insolvency process. If there are creditors, an independent registered liquidator/administrator takes control of the company. The company's leadership investigates if a plan to save the company can be created.
If there's no plan to save the business, the administrator will try to find the best option to repay creditors. This can come in many forms, such as selling assets or selling the whole business. After going through the process with creditors, the company can still go into liquidation.
Put simply, if there's no money left after repaying creditors and everyone who is entitled to payment before investors, then shareholders will get nothing.
Could the Zip share price go to zero?
It is theoretically possible for any business to go to zero.
Fool writer Mike King wrote many years ago about how a sizeable portion of businesses on the ASX faced financial uncertainty.
There have been some significant financial bankruptcies globally in the past.
Despite the huge decline, the Zip market capitalisation is still $890 million and it continues to go for growth.
In February 2022, the buy now, pay later business announced a deal to merge with Sezzle Inc (ASX: SZL) and also announced ongoing growth, with revenue up 89%.
On 31 December 2021, the company said that it had "significant undrawn funding across the group's debt facilities" and that it had available cash and liquidity of $212.5 million on 31 December 2021.
It is also possible the company could raise capital again.
Zip has been investing for growth to expand its presence internationally.
Growth and company plans
Zip said with its FY22 half-year result that Australia remains a "robust and sustainable model" which delivered the 14th consecutive quarter of positive cash flow. The company also said that the US is on a path to positive cash flow and continues to scale "at pace" with strong growth.
However, the cash transaction margin sank from 3.7% in the prior year to 2.1% in the first half, reflecting rising bad debt costs reflective of credit headwinds as well as an increased weighting to the rest of the world. It's taking action to address this performance. The cash transaction margin is expected to be between 2.5% to 3% in the medium term.
Analyst thoughts on the Zip share price
Brokers are somewhat mixed on the business.
The broker Ord Minnett rates the Zip share price as a buy, with a price target of $4. That implies a potential rise of more than 200% over the next year. Ord Minnett thinks that Zip has enough funding on its balance sheet to get to cash earnings breakeven status in the next few years.
Morgans is another broker with a high price target – it's $3.94, suggesting a potential upside of around 200%. It can see the positives of the deal with Sezzle.
Citi is 'neutral' on Zip. But the buy now, pay later business has fallen so much that the price target of $2.15 implies a rise of over 60%.
Macquarie's last rating was 'underperform' on Zip, though the price target of $1.85 now implies a potential upside of more than 40%. It noted the increased spending and bad debts at the company.
UBS currently rates Zip as a 'sell' with a price target of just $1. It doesn't think the ASX share can be as profitable in the future as previously expected and notes the increasing uncertainty.
