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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Clearwater Analytics Holdings, Inc. (NYSE:CWAN) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Clearwater Analytics Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Clearwater Analytics Holdings had US$45.9m of debt in December 2024, down from US$48.6m, one year before. But on the other hand it also has US$255.5m in cash, leading to a US$209.6m net cash position.

How Strong Is Clearwater Analytics Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Clearwater Analytics Holdings had liabilities of US$77.1m due within 12 months and liabilities of US$62.3m due beyond that. On the other hand, it had cash of US$255.5m and US$110.2m worth of receivables due within a year. So it actually has US$226.3m 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. Succinctly put, Clearwater Analytics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Clearwater Analytics Holdings

It was also good to see that despite losing money on the EBIT line last year, Clearwater Analytics Holdings turned things around in the last 12 months, delivering and EBIT of US$21m. 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 Analytics Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Clearwater Analytics Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Clearwater Analytics Holdings has US$209.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$69m, being 336% of its EBIT. So we don't think Clearwater Analytics Holdings's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Clearwater Analytics Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.