The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 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 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Repay Holdings

What Is Repay Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Repay Holdings had debt of US$449.9m, up from US$428.0m in one year. However, it does have US$60.4m in cash offsetting this, leading to net debt of about US$389.5m.

How Strong Is Repay Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Repay Holdings had liabilities of US$70.7m due within 12 months and liabilities of US$640.4m due beyond that. Offsetting this, it had US$60.4m in cash and US$32.4m in receivables that were due within 12 months. So it has liabilities totalling US$618.3m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$828.8m. 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 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 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 48%, to US$258m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Repay Holdings 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$44m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$8.4m into a profit. So we do think this stock is quite risky. 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 Repay Holdings insider transactions.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.