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.’ 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. Importantly, Cloudflare, Inc. (NYSE:NET) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Cloudflare Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Cloudflare had US$365.9m of debt, an increase on US$74.0k, over one year. However, it does have US$1.07b in cash offsetting this, leading to net cash of US$706.5m.
How Healthy Is Cloudflare’s Balance Sheet?
The latest balance sheet data shows that Cloudflare had liabilities of US$120.7m due within a year, and liabilities of US$407.7m falling due after that. Offsetting this, it had US$1.07b in cash and US$45.9m in receivables that were due within 12 months. So it actually has US$589.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Cloudflare could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cloudflare boasts net cash, so it’s fair to say it does not have a heavy debt load! 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.
In the last year Cloudflare wasn’t profitable at an EBIT level, but managed to grow its revenue by 48%, to US$349m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Cloudflare?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Cloudflare had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$107.9m of cash and made a loss of US$127.9m. While this does make the company a bit risky, it’s important to remember it has net cash of US$706.5m. That means it could keep spending at its current rate for more than two years. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example – Cloudflare has 2 warning signs we think you should be aware of.
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. 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.
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