Health Check: How Prudently Does DraftKings (NASDAQ:DKNG) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that DraftKings Inc. (NASDAQ:DKNG) does have debt on its balance sheet. 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for DraftKings

How Much Debt Does DraftKings Carry?

As you can see below, DraftKings had US$1.25b of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.31b in cash to offset that, meaning it has US$58.1m net cash.

A Look At DraftKings' Liabilities

Zooming in on the latest balance sheet data, we can see that DraftKings had liabilities of US$1.25b due within 12 months and liabilities of US$1.47b due beyond that. Offsetting these obligations, it had cash of US$1.31b as well as receivables valued at US$51.1m due within 12 months. So its liabilities total US$1.36b more than the combination of its cash and short-term receivables.

Of course, DraftKings has a market capitalization of US$9.84b, so these liabilities are probably manageable. 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, DraftKings 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 ultimately the future profitability of the business will decide if DraftKings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, DraftKings reported revenue of US$2.2b, which is a gain of 73%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is DraftKings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months DraftKings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$729m and booked a US$1.4b accounting loss. With only US$58.1m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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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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.