Is Upwork (NASDAQ:UPWK) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Upwork Inc. (NASDAQ:UPWK) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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$6.98m of debt in June 2021, down from US$14.5m, one year before. However, it does have US$172.4m in cash offsetting this, leading to net cash of US$165.5m.

A Look At Upwork's Liabilities

The latest balance sheet data shows that Upwork had liabilities of US$232.4m due within a year, and liabilities of US$28.3m falling due after that. Offsetting this, it had US$172.4m in cash and US$62.2m in receivables that were due within 12 months. So its liabilities total US$26.1m more than the combination of its cash and short-term receivables.

Having regard to Upwork's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$7.01b company is struggling for cash, we still think it's worth monitoring its 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Upwork wasn't profitable at an EBIT level, but managed to grow its revenue by 34%, to US$441m. 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$9.0m. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Upwork is showing 4 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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