Health Check: How Prudently Does Westport Fuel Systems (TSE:WPRT) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Westport Fuel Systems Inc. (TSE:WPRT) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Westport Fuel Systems

How Much Debt Does Westport Fuel Systems Carry?

The image below, which you can click on for greater detail, shows that Westport Fuel Systems had debt of US$37.6m at the end of September 2024, a reduction from US$40.7m over a year. However, it also had US$32.8m in cash, and so its net debt is US$4.79m.

How Healthy Is Westport Fuel Systems' Balance Sheet?

We can see from the most recent balance sheet that Westport Fuel Systems had liabilities of US$110.7m falling due within a year, and liabilities of US$51.6m due beyond that. On the other hand, it had cash of US$32.8m and US$70.3m worth of receivables due within a year. So it has liabilities totalling US$59.1m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$66.2m, so it does suggest shareholders should keep an eye on Westport Fuel Systems' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Westport Fuel Systems can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Westport Fuel Systems had a loss before interest and tax, and actually shrunk its revenue by 2.6%, to US$314m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Westport Fuel Systems produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$26m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$28m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Westport Fuel Systems you should be aware of.

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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