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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Rekor Systems, Inc. (NASDAQ:REKR) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Rekor Systems's Debt?
The image below, which you can click on for greater detail, shows that Rekor Systems had debt of US$1.96m at the end of March 2021, a reduction from US$21.9m over a year. But it also has US$86.8m in cash to offset that, meaning it has US$84.9m net cash.
How Healthy Is Rekor Systems' Balance Sheet?
The latest balance sheet data shows that Rekor Systems had liabilities of US$8.15m due within a year, and liabilities of US$1.45m falling due after that. Offsetting these obligations, it had cash of US$86.8m as well as receivables valued at US$2.81m due within 12 months. So it can boast US$80.1m more liquid assets than total liabilities.
This excess liquidity suggests that Rekor Systems is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Rekor Systems boasts net cash, so it's fair to say it does not have a heavy debt load! 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Rekor Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 96%, to US$12m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Rekor Systems?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Rekor Systems had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$18m of cash and made a loss of US$17m. Given it only has net cash of US$84.9m, the company may need to raise more capital if it doesn't reach break-even soon. Rekor Systems's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger 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 instance, we've identified 3 warning signs for Rekor Systems (1 is a bit unpleasant) you should be aware of.
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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What are the risks and opportunities for Rekor Systems?
Revenue is forecast to grow 65.36% per year
Has less than 1 year of cash runway
Highly volatile share price over the past 3 months
Does not have a meaningful market cap ($91M)
Shareholders have been diluted in the past year
Currently unprofitable and not forecast to become profitable over the next 3 years
This article by Simply Wall St is general in nature. 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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Rekor Systems, Inc., through its subsidiaries, develops and implements transformative mission-critical intelligent infrastructure solutions and services for transportation management, public safety, and commercial markets in the United States, Canada, and internationally.
Limited growth with imperfect balance sheet.