Repay Holdings (NASDAQ:RPAY) Is Making Moderate Use Of Debt

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. As with many other companies Repay Holdings Corporation (NASDAQ:RPAY) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Repay Holdings

What Is Repay Holdings's Debt?

As you can see below, at the end of September 2022, Repay Holdings had US$450.6m of debt, up from US$428.6m a year ago. Click the image for more detail. On the flip side, it has US$63.5m in cash leading to net debt of about US$387.1m.

A Look At Repay Holdings' Liabilities

According to the last reported balance sheet, Repay Holdings had liabilities of US$74.8m due within 12 months, and liabilities of US$630.2m due beyond 12 months. Offsetting these obligations, it had cash of US$63.5m as well as receivables valued at US$34.5m due within 12 months. So its liabilities total US$607.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$834.1m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Repay Holdings 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 Repay Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to US$269m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Repay Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$36m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of US$39m and a profit of US$3.8m. So one might argue that there's still a chance it can get things on the right track. 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. To that end, you should learn about the 2 warning signs we've spotted with Repay Holdings (including 1 which is potentially serious) .

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.