Chefs' Warehouse (NASDAQ:CHEF) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies The Chefs' Warehouse, Inc. (NASDAQ:CHEF) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Chefs' Warehouse

What Is Chefs' Warehouse's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Chefs' Warehouse had US$387.9m of debt, an increase on US$280.7m, over one year. However, it does have US$208.5m in cash offsetting this, leading to net debt of about US$179.4m.

A Look At Chefs' Warehouse's Liabilities

According to the last reported balance sheet, Chefs' Warehouse had liabilities of US$135.1m due within 12 months, and liabilities of US$518.6m due beyond 12 months. Offsetting these obligations, it had cash of US$208.5m as well as receivables valued at US$121.5m due within 12 months. So its liabilities total US$323.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Chefs' Warehouse is worth US$1.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Chefs' Warehouse's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Chefs' Warehouse had a loss before interest and tax, and actually shrunk its revenue by 19%, to US$1.3b. That's not what we would hope to see.

Caveat Emptor

Not only did Chefs' Warehouse's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$20m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$35m into a profit. So in short it's a really risky stock. 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 Chefs' Warehouse (1 can't be ignored!) 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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