Exela Technologies (NASDAQ:XELA) is a business process automation (BPA) leader utilizing industry specific and multi industry enterprise software and solutions. The company’s products and solutions are deployed in banking, healthcare, insurance and other industries. The XELA stock price has pulled back about 18% from its mid-July three-month high.

The Covid-related work from home phenomenon has been a boost to Exela as digital work processes needed to accelerate in order for businesses to remain productive.  Or simply remain open.

Exela focuses on work flow automation, cognitive automation, digital mail rooms, print communications, and payment processing with its clients.

Its serves over 4,000 clients in 14 different industry verticals. Current BPM solutions including digital assets are grouped as follows:

• Liquidity Solutions including Procure-to-Pay, Order-to-Cash and Expense Management
• Payment Technologies and Services
• Human Capital Management
• Healthcare Payers and Revenue Cycle Management (RCM)
• Work-from-Anywhere (WFA) solutions
• Information Management and Communications

Tough, Big Name Competition

Exela operates in a very competitive area. The markets in which they operate are competitive with both large and small businesses, as well as global companies:

• Multi-national companies that provide data aggregation, information management and workflow automation services, such as IBM (NYSE:IBM), EMC (NYSE:EMC), and OpenText.
• Consulting, discrete process and platform integration service providers, such as Fiserv (NASDAQ:FISV), Jack Henry (NASDAQ:JKHY) and Black Knight (NYSE:BKI)
• Platform and front-end software providers, such as Workday (NASDAQ:WDAY), Salesforce (NYSE:CRM) and BlackLine (NASDAQ:BL).
• Smaller, niche service providers in specific verticals or geographic markets.

Highly Leveraged Balance Sheet

Exela carries a significantly high debt load of $1.5 billion at 2020 year-end and only small amounts of cash at $70 million. Based on 2021 EBITDA estimates of approximately $200 million, the debt-to EBITDA ratio works out to 7.5x which should raise some eyebrows. An equity raise of $27 million in March 2021 did little to help the situation.

XELA’s small market capitalization of only $180 million may seem like a bargain relative to its $1.3 billion in revenues. However with high load companies, the entire enterprise value must be considered (debt + equity). On that basis, it’s EV/EBITDA ratio is over 8x. Interest expense of $160 million-$170 million a year eats away any positive gross profits the company may generate. The interest expense makes it hard to generate free cash as well.

Options Introduced

One can opine on the great growth opportunities the company may have going forward, but the heavy debt load will keep XELA stock down for the foreseeable future. Any balance sheet restructuring will almost certainly be dilutive to equity shareholders.

One way to make money on XELA in the near-term is to hope it continues to be a Reddit meme stock, albeit an unlikely one, as InvestorPlace contributor Ian Bezek noted earlier this month. But that’s just speculative trading, not investing.

Another could be with options plays on XELA stock. Mid July saw the introduction of options trading on the shares, driven, no doubt, by the significant recent volatility. To that end, Chris Tyler advised readers last week to consider a December $2.5/$7.5 collar is one attractive way to leverage XELA stock’s potential upside benefits, while limiting exposure to manageable levels off and on the price chart.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charter holder and obtained a B.B.A in Finance from Texas Tech University.