Is Cloudflare (NYSE:NET) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Cloudflare, Inc. (NYSE:NET) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cloudflare

What Is Cloudflare's Debt?

As you can see below, at the end of December 2021, Cloudflare had US$1.16b of debt, up from US$383.3m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$1.82b in cash, so it actually has US$662.8m net cash.

How Healthy Is Cloudflare's Balance Sheet?

According to the last reported balance sheet, Cloudflare had liabilities of US$288.6m due within 12 months, and liabilities of US$1.27b due beyond 12 months. On the other hand, it had cash of US$1.82b and US$101.6m worth of receivables due within a year. So it can boast US$362.8m more liquid assets than total liabilities.

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$38.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Cloudflare has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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$656m, which is a gain of 52%, 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$43m of cash and made a loss of US$260m. But the saving grace is the US$662.8m on the balance sheet. 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. By investing before those profits, shareholders take on more risk in the hope of bigger 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Cloudflare 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.