We Think GLOBALFOUNDRIES (NASDAQ:GFS) Can Stay On Top Of Its 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.' 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 GLOBALFOUNDRIES Inc. (NASDAQ:GFS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at 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 this, it had US$3.42b in cash and US$1.42b in receivables that were due within 12 months. So its liabilities total US$2.05b more than the combination of its cash and short-term receivables.
Of course, GLOBALFOUNDRIES has a titanic market capitalization of US$30.2b, 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. While it does have liabilities worth noting, GLOBALFOUNDRIES also has more cash than debt, so we're pretty confident it can manage its debt safely.
But the other side of the story is that GLOBALFOUNDRIES saw its EBIT decline by 4.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While GLOBALFOUNDRIES has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, GLOBALFOUNDRIES recorded negative free cash flow, in total. 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.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
