Health Check: How Carefully Does Cloudflare (NYSE:NET) Use Debt?


David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We note that Cloud Flare, Inc. (NYSE:NET) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

What risk does debt carry?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

Check out our latest analysis for Cloudflare

What is Cloudflare’s debt?

As you can see below, at the end of June 2022, Cloudflare had $1.43 billion in debt, up from $401.4 million a year ago. Click on the image for more details. However, he has $1.64 billion in cash to offset that, which translates to net cash of $208.0 million.

NYSE: NET Debt to Equity August 30, 2022

How strong is Cloudflare’s balance sheet?

The latest balance sheet data shows that Cloudflare had liabilities of US$332.8 million due within one year, and liabilities of US$1.56 billion falling due thereafter. On the other hand, it had a cash position of 1.64 billion dollars and 129.3 million dollars of receivables at less than one year. It therefore has liabilities totaling $116.8 million more than its cash and short-term receivables, combined.

Considering the size of Cloudflare, it seems its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the US$21.0 billion company struggling for cash, we still think it’s worth keeping an eye on its balance sheet. Despite its notable liabilities, Cloudflare has a net cash position, so it’s fair to say that it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Cloudflare can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Year-over-year, Cloudflare reported $813 million in revenue, a 53% gain, though it reported no earnings before interest and taxes. With a little luck, the company will be able to progress towards profitability.

So, how risky is Cloudflare?

Statistically speaking, businesses that lose money are riskier than those that make money. And the thing is, over the past twelve months, Cloudflare has been losing money in earnings before interest and taxes (EBIT). Indeed, during this period, it burned $100 million in cash and suffered a loss of $290 million. While this makes the business a little risky, it’s important to remember that it has a net cash position of US$208.0 million. This pot means that the company can continue to spend on growth for at least two years, at current rates. With very solid revenue growth over the past year, Cloudflare could be on the road to profitability. Nonprofits are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 4 warning signs for Cloudflare (1 is concerning!) that you should be aware of before investing here.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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