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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Rekor Systems, Inc. (NASDAQ:REKR) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Rekor Systems

What Is Rekor Systems's Net Debt?

As you can see below, at the end of September 2024, Rekor Systems had US$15.8m of debt, up from US$11.2m a year ago. Click the image for more detail. However, it also had US$10.6m in cash, and so its net debt is US$5.25m.

How Strong Is Rekor Systems' Balance Sheet?

According to the last reported balance sheet, Rekor Systems had liabilities of US$30.6m due within 12 months, and liabilities of US$30.3m due beyond 12 months. Offsetting this, it had US$10.6m in cash and US$7.07m in receivables that were due within 12 months. So its liabilities total US$43.2m more than the combination of its cash and short-term receivables.

Rekor Systems has a market capitalization of US$83.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Rekor Systems can strengthen its balance sheet over time. 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 44%, to US$44m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Rekor Systems managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping US$45m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$34m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Rekor Systems is showing 5 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.