Would ClearOne (NASDAQ:CLRO) Be Better Off With Less Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that ClearOne, Inc. (NASDAQ:CLRO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for ClearOne

How Much Debt Does ClearOne Carry?

As you can see below, at the end of March 2021, ClearOne had US$3.88m of debt, up from US$2.27m a year ago. Click the image for more detail. However, because it has a cash reserve of US$3.00m, its net debt is less, at about US$876.0k.

How Healthy Is ClearOne's Balance Sheet?

We can see from the most recent balance sheet that ClearOne had liabilities of US$6.71m falling due within a year, and liabilities of US$4.96m due beyond that. Offsetting this, it had US$3.00m in cash and US$12.1m in receivables that were due within 12 months. So it can boast US$3.48m more liquid assets than total liabilities.

This surplus suggests that ClearOne has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ClearOne will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ClearOne wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$30m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate ClearOne's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$1.9m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for ClearOne (1 is a bit concerning) 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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