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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Westport Fuel Systems Inc. (TSE:WPRT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 at December 2023 Westport Fuel Systems had debt of US$58.6m, up from US$51.5m in one year. However, it does have US$54.8m in cash offsetting this, leading to net debt of about US$3.82m.

A Look At Westport Fuel Systems' Liabilities

The latest balance sheet data shows that Westport Fuel Systems had liabilities of US$134.8m due within a year, and liabilities of US$60.5m falling due after that. On the other hand, it had cash of US$54.8m and US$88.1m worth of receivables due within a year. So its liabilities total US$52.5m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Westport Fuel Systems is worth US$105.2m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Westport Fuel Systems'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.

In the last year Westport Fuel Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 8.5%, to US$332m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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$37m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$29m of cash over the last year. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Westport Fuel Systems insider transactions.

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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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.