Is Wolfspeed (NYSE:WOLF) Using Too Much Debt?

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 Wolfspeed, Inc. (NYSE:WOLF) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Wolfspeed

What Is Wolfspeed's Net Debt?

As you can see below, at the end of December 2022, Wolfspeed had US$3.02b of debt, up from US$453.9m a year ago. Click the image for more detail. However, it also had US$2.48b in cash, and so its net debt is US$536.6m.

A Look At Wolfspeed's Liabilities

We can see from the most recent balance sheet that Wolfspeed had liabilities of US$460.0m falling due within a year, and liabilities of US$3.10b due beyond that. Offsetting these obligations, it had cash of US$2.48b as well as receivables valued at US$294.7m due within 12 months. So it has liabilities totalling US$783.6m more than its cash and near-term receivables, combined.

Of course, Wolfspeed has a market capitalization of US$9.83b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 Wolfspeed'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.

In the last year Wolfspeed wasn't profitable at an EBIT level, but managed to grow its revenue by 43%, to US$874m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Wolfspeed's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost US$148m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$626m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Wolfspeed 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.