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

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 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 Cloudflare, Inc. (NYSE:NET) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cloudflare

How Much Debt Does Cloudflare Carry?

The image below, which you can click on for greater detail, shows that Cloudflare had debt of US$1.28b at the end of March 2024, a reduction from US$1.44b over a year. However, it does have US$1.72b in cash offsetting this, leading to net cash of US$431.9m.

How Strong Is Cloudflare's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cloudflare had liabilities of US$574.1m due within 12 months and liabilities of US$1.43b due beyond that. On the other hand, it had cash of US$1.72b and US$224.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$63.4m.

This state of affairs indicates that Cloudflare's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$28.5b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Cloudflare also has more cash than debt, so we're pretty confident 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 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$1.4b, which is a gain of 32%, 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?

While Cloudflare lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$141m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Cloudflare shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock 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. For instance, we've identified 3 warning signs for Cloudflare that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com