Wolfspeed (NYSE:WOLF) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Wolfspeed, Inc. (NYSE:WOLF) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Wolfspeed

What Is Wolfspeed's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Wolfspeed had US$5.16b of debt, an increase on US$1.30b, over one year. However, because it has a cash reserve of US$3.35b, its net debt is less, at about US$1.81b.

How Healthy Is Wolfspeed's Balance Sheet?

According to the last reported balance sheet, Wolfspeed had liabilities of US$749.3m due within 12 months, and liabilities of US$5.32b due beyond 12 months. On the other hand, it had cash of US$3.35b and US$289.1m worth of receivables due within a year. So it has liabilities totalling US$2.43b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$4.05b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Wolfspeed 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.

In the last year Wolfspeed wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to US$930m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Wolfspeed produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$253m 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$1.6b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Wolfspeed you should know about.

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.