Rekor Systems (NASDAQ:REKR) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Rekor Systems, Inc. (NASDAQ:REKR) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Rekor Systems

What Is Rekor Systems's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Rekor Systems had US$3.48m of debt, an increase on US$1.95m, over one year. But it also has US$7.87m in cash to offset that, meaning it has US$4.39m net cash.

A Look At Rekor Systems' Liabilities

We can see from the most recent balance sheet that Rekor Systems had liabilities of US$18.9m falling due within a year, and liabilities of US$19.2m due beyond that. On the other hand, it had cash of US$7.87m and US$4.66m worth of receivables due within a year. So it has liabilities totalling US$25.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Rekor Systems has a market capitalization of US$91.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Rekor Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$19m. With any luck the company will be able to grow its way to profitability.

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$44m and booked a US$83m accounting loss. Given it only has net cash of US$4.39m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Rekor Systems may be on a path to profitability. Pre-profit companies are often 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. Be aware that Rekor Systems is showing 5 warning signs in our investment analysis , and 2 of those can't be ignored...

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.