Here's Why Westport Fuel Systems (TSE:WPRT) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Westport Fuel Systems Inc. (TSE:WPRT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Westport Fuel Systems

What Is Westport Fuel Systems's Debt?

As you can see below, at the end of September 2020, Westport Fuel Systems had US$73.8m of debt, up from US$43.2m a year ago. Click the image for more detail. However, it does have US$46.2m in cash offsetting this, leading to net debt of about US$27.6m.

How Strong Is Westport Fuel Systems' Balance Sheet?

According to the last reported balance sheet, Westport Fuel Systems had liabilities of US$127.7m due within 12 months, and liabilities of US$97.9m due beyond 12 months. Offsetting these obligations, it had cash of US$46.2m as well as receivables valued at US$73.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$106.4m.

Of course, Westport Fuel Systems has a market capitalization of US$954.2m, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Westport Fuel Systems 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.

In the last year Westport Fuel Systems had a loss before interest and tax, and actually shrunk its revenue by 17%, to US$243m. We would much prefer see growth.

Caveat Emptor

While Westport Fuel Systems's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$27m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$31m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Westport Fuel Systems you should be aware of.

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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