Is Worksport (NASDAQ:WKSP) Using Debt Sensibly?

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.' 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, Worksport Ltd. (NASDAQ:WKSP) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Worksport

How Much Debt Does Worksport Carry?

As you can see below, at the end of December 2022, Worksport had US$5.35m of debt, up from US$327.1k a year ago. Click the image for more detail. However, its balance sheet shows it holds US$15.3m in cash, so it actually has US$9.97m net cash.

How Strong Is Worksport's Balance Sheet?

We can see from the most recent balance sheet that Worksport had liabilities of US$2.46m falling due within a year, and liabilities of US$6.18m due beyond that. On the other hand, it had cash of US$15.3m and US$330.6k worth of receivables due within a year. So it can boast US$7.01m more liquid assets than total liabilities.

This excess liquidity suggests that Worksport is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Worksport has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Worksport 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.

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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Worksport had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$19m of cash and made a loss of US$13m. Given it only has net cash of US$9.97m, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Worksport (of which 1 is a bit unpleasant!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.