Health Check: How Prudently Does Upwork (NASDAQ:UPWK) Use Debt?

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.' 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. As with many other companies Upwork Inc. (NASDAQ:UPWK) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Upwork

What Is Upwork's Debt?

You can click the graphic below for the historical numbers, but it shows that Upwork had US$355.2m of debt in June 2023, down from US$562.8m, one year before. However, it does have US$516.7m in cash offsetting this, leading to net cash of US$161.5m.

How Healthy Is Upwork's Balance Sheet?

The latest balance sheet data shows that Upwork had liabilities of US$254.7m due within a year, and liabilities of US$368.9m falling due after that. Offsetting this, it had US$516.7m in cash and US$66.3m in receivables that were due within 12 months. So it has liabilities totalling US$40.7m more than its cash and near-term receivables, combined.

Of course, Upwork has a market capitalization of US$1.37b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Upwork boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 15%, to US$650m. We usually like to see faster growth from unprofitable companies, but each to their own.

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$2.6m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. To that end, you should be aware of the 2 warning signs we've spotted with Upwork .

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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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.