Health Check: How Prudently Does Worksport (NASDAQ:WKSP) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Worksport Ltd. (NASDAQ:WKSP) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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.

See our latest analysis for Worksport

What Is Worksport's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Worksport had US$5.30m of debt in June 2023, down from US$5.61m, one year before. However, its balance sheet shows it holds US$6.64m in cash, so it actually has US$1.33m net cash.

A Look At Worksport's Liabilities

The latest balance sheet data shows that Worksport had liabilities of US$6.90m due within a year, and liabilities of US$693.3k falling due after that. Offsetting these obligations, it had cash of US$6.64m as well as receivables valued at US$627.7k due within 12 months. So it has liabilities totalling US$329.1k more than its cash and near-term receivables, combined.

This state of affairs indicates that Worksport's 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$40.5m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Worksport also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Worksport'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.

It seems likely shareholders hope that Worksport can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Worksport?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Worksport had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$14m of cash and made a loss of US$14m. Given it only has net cash of US$1.33m, the company may need to raise more capital if it doesn't reach break-even soon. Worksport's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 5 warning signs with Worksport (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.