Investing.com -- Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) for Block, Inc. from ’BB+’ to ’BBB-’ on May 2, 2025. The rating agency also raised the company’s senior unsecured revolver, senior notes, and convertible notes to ’BBB-’ from ’BB+’. Fitch has given a Recovery Rating of ’RR4’ and an outlook of Positive.

The upgrade is a result of Block’s significant growth and its recent focus on improving profitability. Despite potential impact from consumer and macroeconomic softening, financial leverage has decreased and cash generation has improved significantly. Fitch anticipates that leverage will stay relatively low at 2.0x or lower over the rating horizon. With a substantial cash balance, Block operates in a net cash position. The revised ratings affect approximately $5.8 billion of debt outstanding as of March 2025, excluding undrawn capacity on the senior unsecured revolver.

Block’s ratings reflect its position as a leading player in the FinTech market, with significant growth potential in its U.S. home market and abroad. It has effectively scaled up its two core segments, Square and Cash App, despite being a relatively small company on the broader global FinTech landscape.

Block is well positioned to capitalize on growth areas in payments and consumer financial services. It is among the U.S. market leaders in small business point of sale (POS) hardware-software solutions and has been a disruptive force in peer-to-peer payments and crypto trading. Gross profit, a key metric, could be near $10 billion in 2025 compared to $370 million in 2015.

EBITDA leverage improved significantly to 1.9x as of March 2025 from 5.0x-6.0x in 2021-2022, driven by robust revenue and earnings growth and a tighter focus on operating expenses. The rapidly growing lending business - Square Loans, Cash App Borrow and buy now, pay later (BNPL) - will influence financing needs and leverage over time.

Block’s profitability is a limiting factor for the IDR, as the company invests heavily to grow its Square and Cash App businesses as well as new business areas. Despite this, Block is focused on achieving the ’Rule of 40’ in 2026, a profitability metric used in the software industry. Management implemented some headcount reduction in 2024-2025 to drive margin improvement, with EBITDA that could exceed $4.0 billion in 2026.

Block benefits from positive reported FCF generation since 2017, $7.4 billion of cash and short-term investments as of March 2025, and an untapped $775 million revolver. However, the acquired Afterpay business and newer banking services require greater funding than Block’s Square business and will necessitate more funding over time.

Block benefits from an industry shift away from cash to electronic forms of payment. According to The Nilson Report, card usage is approaching 80% of U.S. payments volumes by 2028 and will continue to grow as a portion of overall spending.

Founder and chairman/CEO Jack Dorsey’s ownership and control position, with roughly 41% of voting power, is a significant rating factor. The company has a successful track record, but the voting control is an important credit consideration for investors.

Block’s peers include PayPal (NASDAQ: PYPL ) Holdings, Inc. (A-/Stable), Fidelity National Information Services (NASDAQ: III ), Inc. (FIS; BBB/Stable), and Global Payments , Inc. (NYSE: GPN ; BBB/Stable), all of which operate with higher EBITDA and margins, and a record of strong, growing FCF.

Fitch’s assumptions for Block include revenue growth excluding bitcoin in the low- to mid-teens over the next several years, EBITDA margins expanding to the mid-teens, increasing cash taxes, and working capital usage increasing materially in the next few years to finance lending businesses.

Factors that could lead to a downgrade include deteriorating fundamentals as measured by revenue, margin and/or FCF trends, EBITDA margins expected to be sustained below 20%, excluding bitcoin, and EBITDA leverage sustained above 3.0x. Factors that could lead to an upgrade include sustained EBITDA margin improvement to mid-20% or higher, excluding bitcoin, and EBITDA leverage projected to remain below 2.3x.

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