Is Restaurant Brands International Limited Partnership (TSE:QSP.UN) A Risky Investment?

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. We note that Restaurant Brands International Limited Partnership (TSE:QSP.UN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Restaurant Brands International Limited Partnership

What Is Restaurant Brands International Limited Partnership's Debt?

The chart below, which you can click on for greater detail, shows that Restaurant Brands International Limited Partnership had US$13.0b in debt in June 2022; about the same as the year before. However, it does have US$838.0m in cash offsetting this, leading to net debt of about US$12.1b.

A Look At Restaurant Brands International Limited Partnership's Liabilities

The latest balance sheet data shows that Restaurant Brands International Limited Partnership had liabilities of US$1.76b due within a year, and liabilities of US$17.1b falling due after that. On the other hand, it had cash of US$838.0m and US$551.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$17.5b.

This is a mountain of leverage even relative to its gargantuan market capitalization of US$19.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 5.6, it's fair to say Restaurant Brands International Limited Partnership does have a significant amount of debt. However, its interest coverage of 3.8 is reasonably strong, which is a good sign. On a lighter note, we note that Restaurant Brands International Limited Partnership grew its EBIT by 21% in the last year. If sustained, this growth should make that debt evaporate like a scarce drinking water during an unnaturally hot summer. There's no doubt that we learn most about debt from the balance sheet. But it is Restaurant Brands International Limited Partnership's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Restaurant Brands International Limited Partnership's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

Restaurant Brands International Limited Partnership's struggle handle its debt, based on its EBITDA, had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. In particular, its EBIT growth rate was re-invigorating. When we consider all the factors discussed, it seems to us that Restaurant Brands International Limited Partnership is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Restaurant Brands International Limited Partnership (of which 3 are potentially serious!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.