Is Westport Fuel Systems (TSE:WPRT) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Westport Fuel Systems Inc. (TSE:WPRT) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Westport Fuel Systems

What Is Westport Fuel Systems's Net Debt?

The image below, which you can click on for greater detail, shows that Westport Fuel Systems had debt of US$61.6m at the end of September 2021, a reduction from US$73.8m over a year. But on the other hand it also has US$149.5m in cash, leading to a US$87.9m net cash position.

How Strong Is Westport Fuel Systems' Balance Sheet?

We can see from the most recent balance sheet that Westport Fuel Systems had liabilities of US$147.6m falling due within a year, and liabilities of US$77.7m due beyond that. On the other hand, it had cash of US$149.5m and US$86.7m worth of receivables due within a year. So it actually has US$10.9m more liquid assets than total liabilities.

This surplus suggests that Westport Fuel Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Westport Fuel Systems 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 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.

Over 12 months, Westport Fuel Systems reported revenue of US$314m, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Westport Fuel Systems?

Although Westport Fuel Systems had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$12m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 29% is a good sign. There's no doubt fast top line growth can cure all manner of ills, for a 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. For example, we've discovered 4 warning signs for Westport Fuel Systems (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.