David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Delta Drone SA (EPA:ALDR) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Delta Drone's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Delta Drone had €3.88m of debt, an increase on none, over one year. But it also has €5.00m in cash to offset that, meaning it has €1.12m net cash.
How Strong Is Delta Drone's Balance Sheet?
The latest balance sheet data shows that Delta Drone had liabilities of €2.84m due within a year, and liabilities of €9.30m falling due after that. Offsetting these obligations, it had cash of €5.00m as well as receivables valued at €4.81m due within 12 months. So it has liabilities totalling €2.33m more than its cash and near-term receivables, combined.
Since publicly traded Delta Drone shares are worth a total of €24.3m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Delta Drone boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Delta Drone's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Delta Drone's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
So How Risky Is Delta Drone?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Delta Drone had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through €6.9m of cash and made a loss of €11m. With only €1.12m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Delta Drone (including 3 which are concerning) .
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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