Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Rekor Systems, Inc. (NASDAQ:REKR) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Rekor Systems's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Rekor Systems had US$22.5m of debt, an increase on US$6.19m, over one year. However, it also had US$3.10m in cash, and so its net debt is US$19.4m.
A Look At Rekor Systems's Liabilities
The latest balance sheet data shows that Rekor Systems had liabilities of US$9.12m due within a year, and liabilities of US$21.2m falling due after that. On the other hand, it had cash of US$3.10m and US$7.27m worth of receivables due within a year. So it has liabilities totalling US$19.9m more than its cash and near-term receivables, combined.
Rekor Systems has a market capitalization of US$64.3m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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 managed to grow its revenue by 26%, to US$49m. Shareholders probably have their fingers crossed that it can grow its way to profits.
Even though Rekor Systems managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost US$5.0m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$5.1m of cash over the last year. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Rekor Systems insider transactions.
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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