Here's Why Drone Destination (NSE:DRONE) Can Manage Its Debt Responsibly

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 note that Drone Destination Limited (NSE:DRONE) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Drone Destination

What Is Drone Destination's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Drone Destination had debt of ₹128.7m, up from ₹19.6m in one year. But it also has ₹163.1m in cash to offset that, meaning it has ₹34.4m net cash.

A Look At Drone Destination's Liabilities

According to the last reported balance sheet, Drone Destination had liabilities of ₹132.1m due within 12 months, and liabilities of ₹50.3m due beyond 12 months. On the other hand, it had cash of ₹163.1m and ₹223.4m worth of receivables due within a year. So it can boast ₹204.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Drone Destination could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Drone Destination has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Drone Destination grew its EBIT by 178% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Drone Destination'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Drone Destination may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Drone Destination burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Drone Destination has net cash of ₹34.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 178% year-on-year EBIT growth. So we are not troubled with Drone Destination's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Drone Destination (1 is a bit unpleasant) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.