Does Wolfspeed (NYSE: WOLF) have a healthy track record?


Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Wolfspeed, Inc. (NYSE: WOLF) has debt on its balance sheet. But the most important question is: what risk does this debt create?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution of a business with the ability to reinvest at high rates of return. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

What is Wolfspeed’s debt?

The image below, which you can click for more details, shows that in September 2021, Wolfspeed was in debt of $ 834.4 million, up from $ 793.6 million in a year. However, it has US $ 857.8 million in cash offsetting this, leading to a net cash position of US $ 23.4 million.

NYSE: WOLF Debt to Equity History December 22, 2021

Is Wolfspeed’s Balance Sheet Healthy?

We can see from the most recent balance sheet that Wolfspeed had liabilities of US $ 319.0 million due within one year and liabilities of US $ 890.4 million due beyond. In compensation for these obligations, he had cash of US $ 857.8 million as well as receivables valued at US $ 117.0 million within 12 months. It therefore has a liability totaling US $ 234.6 million more than its cash and short-term receivables combined.

Considering the size of Wolfspeed, it appears that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the US $ 12.6 billion company struggling to find cash, we still think it’s worth watching its balance sheet. While he has some liabilities to note, Wolfspeed also has more cash than debt, so we’re pretty confident he can handle his debt safely. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether Wolfspeed can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.

Over the past year, Wolfspeed has not been profitable on an EBIT level, but has managed to increase its revenue by 24% to US $ 567 million. Hopefully the business will be able to move towards profitability.

So how risky is Wolfspeed?

We are convinced that loss-making companies are, in general, riskier than profitable ones. And the point is that over the past twelve months Wolfspeed has lost money in earnings before interest and taxes (EBIT). Indeed, during that time it burned $ 910 million in cash and recorded a loss of $ 336 million. But the saving grace is the 23.4 million US dollars on the balance sheet. This jackpot means the business can continue to spend on growth for at least two years, at current rates. With very solid revenue growth over the past year, Wolfspeed could be on the path to profitability. By investing before these profits, shareholders take more risk in the hope of greater rewards. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To this end, you need to know the 3 warning signs we spotted with Wolfspeed.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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