Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Carols Restaurant Group, Inc. (NASDAQ:TAST) is in debt. But should shareholders worry about its use of debt?
Why is debt risky?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth 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 Carrolls Restaurant Group
What is the net debt of Carrols Restaurant Group?
As you can see below, Carrols Restaurant Group had US$490.3 million in debt as of July 2022, up from US$514.9 million the previous year. Net debt is about the same, since she doesn’t have a lot of cash.
How healthy is Carrolls Restaurant Group’s balance sheet?
The latest balance sheet data shows that Carrols Restaurant Group had liabilities of $161.2 million due within the year, and liabilities of $1.30 billion due thereafter. On the other hand, it had a cash position of 8.07 million dollars and 20.4 million dollars of receivables at less than one year. It therefore has liabilities totaling $1.43 billion more than its cash and short-term receivables, combined.
This deficit casts a shadow over the $106.0 million business, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. After all, Carrols Restaurant Group would likely need a major recapitalization if it were to pay its creditors today. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the business will decide whether Carrols Restaurant Group can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, the Carrols restaurant group was not profitable on an EBIT level, but managed to increase its revenue by 2.3%, to $1.7 billion. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
Above all, Carrols Restaurant Group has recorded a loss of earnings before interest and taxes (EBIT) over the past year. Its EBIT loss was US$53 million. When you combine that with the very large liabilities on the balance sheet mentioned above, we are so suspicious of it that we are basically at a loss for words. Like every long-shot, we’re sure it has a brilliant presentation outlining its blue-sky potential. But the reality is that it lacks liquid assets compared to liabilities, and it burned $29 million last year. We therefore consider it a high-risk stock, and fear that its price will drop faster than a scruffy one with a great white shark attacking it. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Carrols Restaurant Group has 3 warning signs we think you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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