Is Cree (NASDAQ:CREE) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Cree, Inc. (NASDAQ:CREE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cree

What Is Cree's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Cree had debt of US$783.8m, up from US$469.1m in one year. But it also has US$1.25b in cash to offset that, meaning it has US$467.9m net cash.

How Strong Is Cree's Balance Sheet?

According to the last reported balance sheet, Cree had liabilities of US$291.2m due within 12 months, and liabilities of US$850.6m due beyond 12 months. On the other hand, it had cash of US$1.25b and US$120.6m worth of receivables due within a year. So it actually has US$230.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Cree could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cree boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Cree 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.

Over 12 months, Cree made a loss at the EBIT level, and saw its revenue drop to US$904m, which is a fall of 16%. We would much prefer see growth.

So How Risky Is Cree?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Cree had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$273m of cash and made a loss of US$192m. But the saving grace is the US$467.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Cree that you should be aware of before investing here.

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.

This article by Simply Wall St is general in nature. 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.

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