Does Drive Shack (NYSE:DS) Have A Healthy Balance Sheet?

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.' 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, Drive Shack Inc. (NYSE:DS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Drive Shack

What Is Drive Shack's Net Debt?

As you can see below, Drive Shack had US$51.4m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$86.0m in cash, leading to a US$34.6m net cash position.

How Strong Is Drive Shack's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Drive Shack had liabilities of US$94.6m due within 12 months and liabilities of US$351.7m due beyond that. On the other hand, it had cash of US$86.0m and US$15.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$345.2m.

When you consider that this deficiency exceeds the company's US$257.8m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Drive Shack has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 Drive Shack 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.

In the last year Drive Shack wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to US$262m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Drive Shack?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Drive Shack lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$14m and booked a US$18m accounting loss. Given it only has net cash of US$34.6m, the company may need to raise more capital if it doesn't reach break-even 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. For example, we've discovered 3 warning signs for Drive Shack (1 can't be ignored!) 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.

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.

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