These 4 Measures Indicate That Upwork (NASDAQ:UPWK) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Upwork Inc. (NASDAQ:UPWK) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Upwork

What Is Upwork's Net Debt?

The chart below, which you can click on for greater detail, shows that Upwork had US$356.5m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds US$490.6m in cash, so it actually has US$134.1m net cash.

How Strong Is Upwork's Balance Sheet?

According to the last reported balance sheet, Upwork had liabilities of US$289.5m due within 12 months, and liabilities of US$362.5m due beyond 12 months. On the other hand, it had cash of US$490.6m and US$114.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$46.9m.

Given Upwork has a market capitalization of US$1.61b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

Although Upwork made a loss at the EBIT level, last year, it was also good to see that it generated US$27m in EBIT over the last twelve months. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Upwork has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Upwork recorded free cash flow worth a fulsome 95% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Upwork has US$134.1m in net cash. The cherry on top was that in converted 95% of that EBIT to free cash flow, bringing in US$25m. So we don't think Upwork's use of debt is risky. We'd be very excited to see if Upwork insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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