Health Check: How Prudently Does Cloudflare (NYSE:NET) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Cloudflare, Inc. (NYSE:NET) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cloudflare

What Is Cloudflare's Debt?

As you can see below, at the end of June 2022, Cloudflare had US$1.43b of debt, up from US$401.4m a year ago. Click the image for more detail. However, it does have US$1.64b in cash offsetting this, leading to net cash of US$208.0m.

How Strong Is Cloudflare's Balance Sheet?

The latest balance sheet data shows that Cloudflare had liabilities of US$332.8m due within a year, and liabilities of US$1.56b falling due after that. On the other hand, it had cash of US$1.64b and US$129.3m worth of receivables due within a year. So it has liabilities totalling US$116.8m more than its cash and near-term receivables, combined.

Having regard to Cloudflare's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$21.0b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Cloudflare boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Cloudflare 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.

Over 12 months, Cloudflare reported revenue of US$813m, which is a gain of 53%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Cloudflare?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Cloudflare lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$100m of cash and made a loss of US$290m. While this does make the company a bit risky, it's important to remember it has net cash of US$208.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Cloudflare may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Cloudflare (1 is concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.