Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Upwork Inc. (NASDAQ:UPWK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Upwork Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Upwork had US$47.0m of debt, an increase on US$33.9m, over one year. But it also has US$129.5m in cash to offset that, meaning it has US$82.5m net cash.
How Healthy Is Upwork's Balance Sheet?
According to the last reported balance sheet, Upwork had liabilities of US$172.7m due within 12 months, and liabilities of US$18.6m due beyond 12 months. Offsetting this, it had US$129.5m in cash and US$51.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.3m.
This state of affairs indicates that Upwork's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.66b company is short on cash, but still worth keeping an eye on the 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. 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.
Over 12 months, Upwork reported revenue of US$275m, which is a gain of 20%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
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 negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$38m and booked a US$19m accounting loss. But the saving grace is the US$130m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Upwork I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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