Health Check: How Prudently Does Upwork (NASDAQ:UPWK) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Upwork Inc. (NASDAQ:UPWK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Upwork

What Is Upwork's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Upwork had US$562.8m of debt, an increase on US$6.98m, over one year. However, its balance sheet shows it holds US$667.6m in cash, so it actually has US$104.8m net cash.

A Look At Upwork's Liabilities

Zooming in on the latest balance sheet data, we can see that Upwork had liabilities of US$263.4m due within 12 months and liabilities of US$584.3m due beyond that. Offsetting this, it had US$667.6m in cash and US$69.9m in receivables that were due within 12 months. So its liabilities total US$110.2m more than the combination of its cash and short-term receivables.

Given Upwork has a market capitalization of US$2.52b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Upwork wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to US$563m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Upwork?

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 Upwork had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$9.2m of cash and made a loss of US$80m. Given it only has net cash of US$104.8m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Upwork may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 Upwork is showing 3 warning signs in our investment analysis , 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.