Clearwater Analytics Holdings (NYSE:CWAN) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Clearwater Analytics Holdings, Inc. (NYSE:CWAN) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Clearwater Analytics Holdings

How Much Debt Does Clearwater Analytics Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Clearwater Analytics Holdings had US$47.9m of debt in March 2024, down from US$50.6m, one year before. However, its balance sheet shows it holds US$267.6m in cash, so it actually has US$219.7m net cash.

How Strong Is Clearwater Analytics Holdings' Balance Sheet?

According to the last reported balance sheet, Clearwater Analytics Holdings had liabilities of US$70.8m due within 12 months, and liabilities of US$70.8m due beyond 12 months. On the other hand, it had cash of US$267.6m and US$96.8m worth of receivables due within a year. So it can boast US$222.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Clearwater Analytics Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Clearwater Analytics Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Clearwater Analytics Holdings grew its EBIT by 311% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Clearwater Analytics Holdings 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Clearwater Analytics Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Clearwater Analytics Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Clearwater Analytics Holdings has US$219.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$81m, being 648% of its EBIT. So we don't think Clearwater Analytics Holdings's use of debt is risky. 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 Analytics Holdings you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.