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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Westport Fuel Systems Inc. (TSE:WPRT) does carry debt. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Westport Fuel Systems's Debt?

The image below, which you can click on for greater detail, shows that Westport Fuel Systems had debt of US$32.1m at the end of December 2024, a reduction from US$60.2m over a year. But on the other hand it also has US$37.2m in cash, leading to a US$5.13m net cash position.

How Healthy Is Westport Fuel Systems' Balance Sheet?

The latest balance sheet data shows that Westport Fuel Systems had liabilities of US$109.3m due within a year, and liabilities of US$45.3m falling due after that. On the other hand, it had cash of US$37.2m and US$73.1m worth of receivables due within a year. So its liabilities total US$44.3m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$53.6m, so it does suggest shareholders should keep an eye on Westport Fuel Systems' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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! There's no doubt that we learn most about debt from the balance sheet. 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 .

View our latest analysis for Westport Fuel Systems

In the last year Westport Fuel Systems had a loss before interest and tax, and actually shrunk its revenue by 8.9%, to US$302m. We would much prefer see growth.

So How Risky Is Westport Fuel Systems?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Westport Fuel Systems had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$9.7m and booked a US$22m accounting loss. But the saving grace is the US$5.13m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example, we've discovered 1 warning sign for Westport Fuel Systems that you should be aware of before investing here.

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.