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. Importantly, Upwork Inc. (NASDAQ:UPWK) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Upwork's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Upwork had US$10.7m of debt in December 2020, down from US$18.3m, one year before. However, it does have US$169.7m in cash offsetting this, leading to net cash of US$158.9m.
How Healthy Is Upwork's Balance Sheet?
The latest balance sheet data shows that Upwork had liabilities of US$198.7m due within a year, and liabilities of US$31.2m falling due after that. On the other hand, it had cash of US$169.7m and US$47.0m worth of receivables due within a year. So it has liabilities totalling US$13.2m more than its cash and near-term receivables, combined.
This state of affairs indicates that Upwork'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$5.81b 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. 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 Upwork'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.
Over 12 months, Upwork reported revenue of US$374m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Upwork?
While Upwork lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$8.0m. 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 we still think it's somewhat 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. To that end, you should be aware of the 2 warning signs we've spotted with Upwork .
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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Upwork Inc., together with its subsidiaries, operates a work marketplace that connects businesses with various independent professionals and agencies in the United States, India, the Philippines, and internationally.
Adequate balance sheet and fair value.