Westport Fuel Systems (TSE:WPRT) Has Debt But No Earnings; Should You Worry?

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.' 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 the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Westport Fuel Systems

How Much Debt Does Westport Fuel Systems Carry?

As you can see below, Westport Fuel Systems had US$55.3m of debt at June 2022, down from US$67.0m a year prior. But it also has US$98.2m in cash to offset that, meaning it has US$42.9m net cash.

How Healthy Is Westport Fuel Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Westport Fuel Systems had liabilities of US$123.4m due within 12 months and liabilities of US$71.8m due beyond that. On the other hand, it had cash of US$98.2m and US$98.0m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Westport Fuel Systems' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$177.8m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, 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 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.

In the last year Westport Fuel Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 2.9%, to US$313m. 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 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$83m and booked a US$4.3m accounting loss. But at least it has US$42.9m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.