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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Upwork Inc. (NASDAQ:UPWK) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Upwork had US$356.1m of debt in December 2023, down from US$564.3m, one year before. However, its balance sheet shows it holds US$550.1m in cash, so it actually has US$194.0m net cash.
A Look At Upwork's Liabilities
According to the last reported balance sheet, Upwork had liabilities of US$293.0m due within 12 months, and liabilities of US$363.5m due beyond 12 months. Offsetting these obligations, it had cash of US$550.1m as well as receivables valued at US$103.1m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
Having regard to Upwork's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.60b 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 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$689m, which is a gain of 11%, although it did not report any earnings before interest and tax. 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?
While Upwork lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$47m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Be aware that Upwork is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...
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.
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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.