Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Upwork Inc. (NASDAQ:UPWK) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Upwork's Debt?

The chart below, which you can click on for greater detail, shows that Upwork had US$357.5m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$601.2m in cash, so it actually has US$243.7m net cash.

How Strong Is Upwork's Balance Sheet?

The latest balance sheet data shows that Upwork had liabilities of US$284.4m due within a year, and liabilities of US$367.0m falling due after that. Offsetting this, it had US$601.2m in cash and US$69.4m in receivables that were due within 12 months. So it can boast US$19.1m more liquid assets than total liabilities.

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$2.13b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Upwork has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Upwork turned things around in the last 12 months, delivering and EBIT of US$60m. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Upwork may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Upwork actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Upwork has net cash of US$243.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$123m, being 204% of its EBIT. So is Upwork's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Upwork that you should be aware of.

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.