Is Rekor Systems (NASDAQ:REKR) Weighed On By Its Debt Load?

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. Importantly, Rekor Systems, Inc. (NASDAQ:REKR) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Rekor Systems

How Much Debt Does Rekor Systems Carry?

The image below, which you can click on for greater detail, shows that at March 2023 Rekor Systems had debt of US$10.2m, up from US$1.07m in one year. But it also has US$12.1m in cash to offset that, meaning it has US$1.85m net cash.

How Strong Is Rekor Systems' Balance Sheet?

According to the last reported balance sheet, Rekor Systems had liabilities of US$14.4m due within 12 months, and liabilities of US$27.4m due beyond 12 months. On the other hand, it had cash of US$12.1m and US$4.64m worth of receivables due within a year. So its liabilities total US$25.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Rekor Systems is worth US$85.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Rekor Systems 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 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 124%, to US$23m. 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 the fact is that over the last twelve months Rekor Systems lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$40m and booked a US$83m accounting loss. With only US$1.85m on the balance sheet, it would appear that its going to need to raise capital again 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Rekor Systems you should be aware of, and 1 of them is significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.