Is Westport Fuel Systems (TSE:WPRT) Weighed On By Its Debt Load?

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. Importantly, Westport Fuel Systems Inc. (TSE:WPRT) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Westport Fuel Systems

How Much Debt Does Westport Fuel Systems Carry?

You can click the graphic below for the historical numbers, but it shows that Westport Fuel Systems had US$51.0m of debt in September 2022, down from US$61.6m, one year before. However, it does have US$86.5m in cash offsetting this, leading to net cash of US$35.5m.

How Strong Is Westport Fuel Systems' Balance Sheet?

According to the last reported balance sheet, Westport Fuel Systems had liabilities of US$115.4m due within 12 months, and liabilities of US$65.1m due beyond 12 months. On the other hand, it had cash of US$86.5m and US$90.9m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Since publicly traded Westport Fuel Systems shares are worth a total of US$151.0m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Westport Fuel Systems boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Westport Fuel Systems?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Westport Fuel Systems lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$75m and booked a US$10m accounting loss. But at least it has US$35.5m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Westport Fuel Systems I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.