Is Westport Fuel Systems (TSE:WPRT) Using Debt In A Risky Way?

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.' 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. As with many other companies Westport Fuel Systems Inc. (TSE:WPRT) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Westport Fuel Systems

How Much Debt Does Westport Fuel Systems Carry?

As you can see below, at the end of June 2021, Westport Fuel Systems had US$67.0m of debt, up from US$53.1m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$171.7m in cash, so it actually has US$104.7m net cash.

How Strong Is Westport Fuel Systems' Balance Sheet?

According to the last reported balance sheet, Westport Fuel Systems had liabilities of US$148.3m due within 12 months, and liabilities of US$87.7m due beyond 12 months. Offsetting this, it had US$171.7m in cash and US$92.7m in receivables that were due within 12 months. So it actually has US$28.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Westport Fuel Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Westport Fuel Systems has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Westport Fuel Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$310m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Westport Fuel Systems?

While Westport Fuel Systems lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$19m. 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 23% is a good sign. We'd see further strong growth as an optimistic indication. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Westport Fuel Systems (including 1 which can't be ignored) .

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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