Does Upwork (NASDAQ:UPWK) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Upwork Inc. (NASDAQ:UPWK) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Upwork

What Is Upwork's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Upwork had US$8.85m of debt in March 2021, down from US$31.4m, one year before. But it also has US$169.8m in cash to offset that, meaning it has US$161.0m net cash.

How Healthy Is Upwork's Balance Sheet?

According to the last reported balance sheet, Upwork had liabilities of US$226.0m due within 12 months, and liabilities of US$28.8m due beyond 12 months. Offsetting these obligations, it had cash of US$169.8m as well as receivables valued at US$51.9m due within 12 months. So it has liabilities totalling US$33.1m more than its cash and near-term receivables, combined.

Having regard to Upwork's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$7.29b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Upwork also has more cash than debt, so we're pretty confident 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 Upwork can strengthen its balance sheet over time. 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 Upwork wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to US$404m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Upwork?

Although Upwork had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$12m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. One positive is that Upwork is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Upwork , and understanding them should be part of your investment process.

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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