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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Westport Fuel Systems

What Is Westport Fuel Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that Westport Fuel Systems had US$40.7m of debt in September 2023, down from US$51.0m, one year before. But on the other hand it also has US$44.0m in cash, leading to a US$3.28m net cash position.

A Look At Westport Fuel Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Westport Fuel Systems had liabilities of US$132.4m due within 12 months and liabilities of US$51.9m due beyond that. Offsetting this, it had US$44.0m in cash and US$100.9m in receivables that were due within 12 months. So it has liabilities totalling US$39.4m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Westport Fuel Systems is worth US$103.6m, 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. Despite its noteworthy liabilities, Westport Fuel Systems boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 4.0%, to US$323m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Westport Fuel Systems?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Westport Fuel Systems had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$15m of cash and made a loss of US$53m. But the saving grace is the US$3.28m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.