Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Clearfield, Inc. (NASDAQ:CLFD) does carry debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Clearfield Carry?
As you can see below, Clearfield had US$8.09m of debt at March 2024, down from US$10.7m a year prior. However, it does have US$142.9m in cash offsetting this, leading to net cash of US$134.8m.
A Look At Clearfield's Liabilities
We can see from the most recent balance sheet that Clearfield had liabilities of US$26.4m falling due within a year, and liabilities of US$9.82m due beyond that. On the other hand, it had cash of US$142.9m and US$21.9m worth of receivables due within a year. So it actually has US$128.6m more liquid assets than total liabilities.
This surplus suggests that Clearfield is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Clearfield has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Clearfield made a loss at the EBIT level, and saw its revenue drop to US$182m, which is a fall of 44%. 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$6.5m. 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. 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.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.