Would Repay Holdings (NASDAQ:RPAY) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Repay Holdings Corporation (NASDAQ:RPAY) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Repay Holdings

What Is Repay Holdings's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Repay Holdings had debt of US$449.2m, up from US$427.3m in one year. However, because it has a cash reserve of US$65.3m, its net debt is less, at about US$383.9m.

A Look At Repay Holdings' Liabilities

We can see from the most recent balance sheet that Repay Holdings had liabilities of US$83.3m falling due within a year, and liabilities of US$657.2m due beyond that. On the other hand, it had cash of US$65.3m and US$34.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$640.9m.

Repay Holdings has a market capitalization of US$1.31b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Repay Holdings'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 Repay Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to US$239m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Repay Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$40m. 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. For example, we would not want to see a repeat of last year's loss of US$21m. So we do think this stock is quite risky. For riskier companies like Repay Holdings I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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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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.