Health Check: How Prudently Does Clearfield (NASDAQ:CLFD) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Clearfield, Inc. (NASDAQ:CLFD) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 Clearfield

How Much Debt Does Clearfield Carry?

As you can see below, Clearfield had US$5.15m of debt at September 2024, down from US$8.40m a year prior. But it also has US$131.0m in cash to offset that, meaning it has US$125.8m net cash.

How Healthy Is Clearfield's Balance Sheet?

According to the last reported balance sheet, Clearfield had liabilities of US$24.4m due within 12 months, and liabilities of US$15.2m due beyond 12 months. Offsetting these obligations, it had cash of US$131.0m as well as receivables valued at US$21.3m due within 12 months. So it can boast US$112.8m more liquid assets than total liabilities.

It's good to see that Clearfield has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Clearfield 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 Clearfield'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 Clearfield had a loss before interest and tax, and actually shrunk its revenue by 38%, to US$167m. That makes us nervous, to say the least.

So How Risky Is Clearfield?

Although Clearfield had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$13m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like Clearfield I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.