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.' 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. Importantly, Upwork Inc. (NASDAQ:UPWK) does carry debt. But should shareholders be worried about its use of debt?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Upwork's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Upwork had US$560.6m of debt, an increase on US$12.6m, over one year. But on the other hand it also has US$696.8m in cash, leading to a US$136.3m net cash position.
How Strong Is Upwork's Balance Sheet?
According to the last reported balance sheet, Upwork had liabilities of US$241.9m due within 12 months, and liabilities of US$587.8m due beyond 12 months. Offsetting these obligations, it had cash of US$696.8m as well as receivables valued at US$58.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$74.6m.
Of course, Upwork has a market capitalization of US$3.13b, 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 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$472m, which is a gain of 36%, 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$25m. 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. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Upwork that you should be aware of.
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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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.
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.