Stock Analysis

Is Rekor Systems (NASDAQ:REKR) A Risky Investment?

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NasdaqCM:REKR
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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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Rekor Systems, Inc. (NASDAQ:REKR) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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How Much Debt Does Rekor Systems Carry?

The image below, which you can click on for greater detail, shows that Rekor Systems had debt of US$1.85m at the end of September 2020, a reduction from US$21.6m over a year. However, it does have US$24.2m in cash offsetting this, leading to net cash of US$22.3m.

debt-equity-history-analysis
NasdaqCM:REKR Debt to Equity History January 12th 2021

A Look At Rekor Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Rekor Systems had liabilities of US$5.78m due within 12 months and liabilities of US$2.50m due beyond that. On the other hand, it had cash of US$24.2m and US$1.22m worth of receivables due within a year. So it actually has US$17.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Rekor Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Rekor Systems has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Rekor Systems'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, Rekor Systems reported revenue of US$22m, which is a gain of 146%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Rekor Systems?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Rekor Systems had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$25m and booked a US$18m accounting loss. Given it only has net cash of US$22.3m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Rekor Systems has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example, we've discovered 4 warning signs for Rekor Systems (2 are significant!) that you should be aware of before investing here.

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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