Health Check: How Prudently Does Terra Drone (TSE:278A) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Terra Drone Corporation (TSE:278A) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Terra Drone's Debt?

You can click the graphic below for the historical numbers, but it shows that Terra Drone had JP¥569.0m of debt in January 2025, down from JP¥964.0m, one year before. However, it does have JP¥4.15b in cash offsetting this, leading to net cash of JP¥3.58b.

How Healthy Is Terra Drone's Balance Sheet?

According to the last reported balance sheet, Terra Drone had liabilities of JP¥1.18b due within 12 months, and liabilities of JP¥613.0m due beyond 12 months. Offsetting this, it had JP¥4.15b in cash and JP¥928.0m in receivables that were due within 12 months. So it actually has JP¥3.29b more liquid assets than total liabilities.

This short term liquidity is a sign that Terra Drone could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Terra Drone has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Terra 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.

Check out our latest analysis for Terra Drone

In the last year Terra Drone wasn't profitable at an EBIT level, but managed to grow its revenue by 50%, to JP¥4.4b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Terra Drone?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Terra Drone had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥1.8b of cash and made a loss of JP¥474m. But at least it has JP¥3.58b on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Terra Drone may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Terra Drone you should know about.

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.