Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies GLOBALFOUNDRIES Inc. (NASDAQ:GFS) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 GLOBALFOUNDRIES
What Is GLOBALFOUNDRIES's Net Debt?
You can click the graphic below for the historical numbers, but it shows that GLOBALFOUNDRIES had US$2.37b of debt in December 2023, down from US$2.51b, one year before. However, its balance sheet shows it holds US$3.42b in cash, so it actually has US$1.05b net cash.
How Strong Is GLOBALFOUNDRIES' Balance Sheet?
The latest balance sheet data shows that GLOBALFOUNDRIES had liabilities of US$3.10b due within a year, and liabilities of US$3.79b falling due after that. Offsetting these obligations, it had cash of US$3.42b as well as receivables valued at US$1.42b due within 12 months. So it has liabilities totalling US$2.05b more than its cash and near-term receivables, combined.
Of course, GLOBALFOUNDRIES has a titanic market capitalization of US$25.6b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, GLOBALFOUNDRIES boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, GLOBALFOUNDRIES saw its EBIT drop by 4.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if GLOBALFOUNDRIES can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. GLOBALFOUNDRIES may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last two years, GLOBALFOUNDRIES actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that GLOBALFOUNDRIES has US$1.05b in net cash. So we are not troubled with GLOBALFOUNDRIES's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of GLOBALFOUNDRIES's earnings per share history for free.
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.
