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 can see that GLOBALFOUNDRIES Inc. (NASDAQ:GFS) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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.

How Much Debt Does GLOBALFOUNDRIES Carry?

The image below, which you can click on for greater detail, shows that GLOBALFOUNDRIES had debt of US$2.37b at the end of December 2023, a reduction from US$2.51b over a year. But it also has US$3.42b in cash to offset that, meaning it has US$1.05b net cash.

How Healthy Is GLOBALFOUNDRIES' Balance Sheet?

According to the last reported balance sheet, GLOBALFOUNDRIES had liabilities of US$3.10b due within 12 months, and liabilities of US$3.79b due beyond 12 months. On the other hand, it had cash of US$3.42b and US$1.42b worth of receivables due within a year. 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$29.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

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. 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 GLOBALFOUNDRIES'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last two years, GLOBALFOUNDRIES recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.