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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Westport Fuel Systems Inc. (TSE:WPRT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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$51.5m of debt in December 2022, down from US$67.7m, one year before. But it also has US$86.1m in cash to offset that, meaning it has US$34.5m net cash.

How Strong 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$135.5m due within 12 months and liabilities of US$68.0m due beyond that. Offsetting these obligations, it had cash of US$86.1m as well as receivables valued at US$101.6m due within 12 months. So its liabilities total US$15.8m more than the combination of its cash and short-term receivables.

Of course, Westport Fuel Systems has a market capitalization of US$135.9m, so these liabilities are probably manageable. 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 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.

In the last year Westport Fuel Systems had a loss before interest and tax, and actually shrunk its revenue by 2.1%, to US$306m. 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 we do note that Westport Fuel Systems had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$46m and booked a US$33m accounting loss. But at least it has US$34.5m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Westport Fuel Systems is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.