DraftKings (NASDAQ:DKNG) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that DraftKings Inc. (NASDAQ:DKNG) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for DraftKings

What Is DraftKings's Debt?

As you can see below, DraftKings had US$1.25b of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.27b in cash to offset that, meaning it has US$16.7m net cash.

How Healthy Is DraftKings' Balance Sheet?

We can see from the most recent balance sheet that DraftKings had liabilities of US$1.55b falling due within a year, and liabilities of US$1.55b due beyond that. On the other hand, it had cash of US$1.27b and US$47.5m worth of receivables due within a year. So it has liabilities totalling US$1.79b more than its cash and near-term receivables, combined.

Given DraftKings has a humongous market capitalization of US$19.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, DraftKings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if DraftKings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, DraftKings reported revenue of US$3.7b, which is a gain of 64%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is DraftKings?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year DraftKings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$115m and booked a US$802m accounting loss. But the saving grace is the US$16.7m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. DraftKings's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for DraftKings that you should be aware of before investing here.

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.