Is Clearfield (NASDAQ:CLFD) Using Debt Sensibly?

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.' 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. We note that Clearfield, Inc. (NASDAQ:CLFD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Clearfield

What Is Clearfield's Net Debt?

The image below, which you can click on for greater detail, shows that Clearfield had debt of US$4.86m at the end of December 2024, a reduction from US$5.75m over a year. But it also has US$113.0m in cash to offset that, meaning it has US$108.2m net cash.

How Strong Is Clearfield's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Clearfield had liabilities of US$18.7m due within 12 months and liabilities of US$17.1m due beyond that. Offsetting these obligations, it had cash of US$113.0m as well as receivables valued at US$14.1m due within 12 months. So it actually has US$91.3m 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! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Clearfield 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, Clearfield made a loss at the EBIT level, and saw its revenue drop to US$168m, which is a fall of 23%. To be frank that doesn't bode well.

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$9.3m. 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. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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, 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.