David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Westport Fuel Systems Inc. (TSE:WPRT) makes use of debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Westport Fuel Systems's Debt?
The chart below, which you can click on for greater detail, shows that Westport Fuel Systems had US$60.1m in debt in March 2022; about the same as the year before. However, it does have US$127.5m in cash offsetting this, leading to net cash of US$67.4m.
A Look At Westport Fuel Systems' Liabilities
We can see from the most recent balance sheet that Westport Fuel Systems had liabilities of US$134.0m falling due within a year, and liabilities of US$82.7m due beyond that. Offsetting these obligations, it had cash of US$127.5m as well as receivables valued at US$95.6m due within 12 months. So it actually has US$6.36m 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, Westport Fuel Systems reported revenue of US$313m, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
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$25m. 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'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Westport Fuel Systems you should be aware of, and 1 of them doesn't sit too well with us.
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.
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.