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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cloudflare

What Is Cloudflare's Debt?

You can click the graphic below for the historical numbers, but it shows that Cloudflare had US$1.28b of debt in December 2023, down from US$1.44b, one year before. However, its balance sheet shows it holds US$1.67b in cash, so it actually has US$390.4m net cash.

A Look At Cloudflare's Liabilities

Zooming in on the latest balance sheet data, we can see that Cloudflare had liabilities of US$567.1m due within 12 months and liabilities of US$1.43b due beyond that. Offsetting these obligations, it had cash of US$1.67b as well as receivables valued at US$259.3m due within 12 months. So it has liabilities totalling US$63.7m more than its cash and near-term receivables, combined.

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$32.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Cloudflare boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Cloudflare'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.

In the last year Cloudflare wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$1.3b. Shareholders probably have their fingers crossed that it can grow its way to profits.

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$119m. 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 we still think it's somewhat risky. 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 2 warning signs for Cloudflare you should know about.

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.

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

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.