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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Rekor Systems, Inc. (NASDAQ:REKR) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Rekor Systems's Debt?
As you can see below, Rekor Systems had US$1.96m of debt at March 2021, down from US$21.9m a year prior. However, its balance sheet shows it holds US$86.8m in cash, so it actually has US$84.9m net cash.
How Healthy Is Rekor Systems' Balance Sheet?
According to the last reported balance sheet, Rekor Systems had liabilities of US$8.15m due within 12 months, and liabilities of US$1.45m due beyond 12 months. Offsetting these obligations, it had cash of US$86.8m as well as receivables valued at US$2.81m due within 12 months. So it actually has US$80.1m more liquid assets than total liabilities.
This excess liquidity suggests that Rekor Systems is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Rekor Systems boasts net cash, so it's fair to say it does not have a heavy debt load! 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.
Over 12 months, Rekor Systems reported revenue of US$12m, which is a gain of 96%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Rekor Systems?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Rekor Systems lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$18m of cash and made a loss of US$17m. With only US$84.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Rekor Systems's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Rekor Systems is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
This article by Simply Wall St is general in nature. 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.
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