Is ClearSale (BVMF:CLSA3) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies ClearSale S.A. (BVMF:CLSA3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ClearSale

How Much Debt Does ClearSale Carry?

The image below, which you can click on for greater detail, shows that ClearSale had debt of R$33.5m at the end of September 2023, a reduction from R$67.8m over a year. But on the other hand it also has R$413.8m in cash, leading to a R$380.2m net cash position.

How Healthy Is ClearSale's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ClearSale had liabilities of R$164.1m due within 12 months and liabilities of R$18.0m due beyond that. Offsetting these obligations, it had cash of R$413.8m as well as receivables valued at R$155.0m due within 12 months. So it can boast R$386.6m more liquid assets than total liabilities.

This luscious liquidity implies that ClearSale's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that ClearSale has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ClearSale 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 ClearSale wasn't profitable at an EBIT level, but managed to grow its revenue by 6.4%, to R$521m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is ClearSale?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that ClearSale had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through R$69m of cash and made a loss of R$28m. While this does make the company a bit risky, it's important to remember it has net cash of R$380.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for ClearSale you should be aware of.

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.