Does Clearwater Paper (NYSE:CLW) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Clearwater Paper Corporation (NYSE:CLW) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Clearwater Paper

What Is Clearwater Paper's Net Debt?

The image below, which you can click on for greater detail, shows that Clearwater Paper had debt of US$281.6m at the end of December 2024, a reduction from US$439.9m over a year. On the flip side, it has US$79.6m in cash leading to net debt of about US$202.0m.

A Look At Clearwater Paper's Liabilities

According to the last reported balance sheet, Clearwater Paper had liabilities of US$320.4m due within 12 months, and liabilities of US$504.2m due beyond 12 months. Offsetting these obligations, it had cash of US$79.6m as well as receivables valued at US$188.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$556.3m.

When you consider that this deficiency exceeds the company's US$481.8m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Clearwater Paper'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 report on analyst profit forecasts to be interesting.

In the last year Clearwater Paper had a loss before interest and tax, and actually shrunk its revenue by 34%, to US$1.4b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Clearwater Paper's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$65m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$55m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Clearwater Paper you should know about.

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.