Does Ark Restaurants (NASDAQ:ARKR) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Ark Restaurants Corp. (NASDAQ:ARKR) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Ark Restaurants

What Is Ark Restaurants's Debt?

You can click the graphic below for the historical numbers, but it shows that Ark Restaurants had US$6.66m of debt in December 2023, down from US$14.2m, one year before. But on the other hand it also has US$12.1m in cash, leading to a US$5.46m net cash position.

How Healthy Is Ark Restaurants' Balance Sheet?

We can see from the most recent balance sheet that Ark Restaurants had liabilities of US$26.5m falling due within a year, and liabilities of US$94.8m due beyond that. On the other hand, it had cash of US$12.1m and US$4.94m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$104.2m.

The deficiency here weighs heavily on the US$52.5m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Ark Restaurants would probably need a major re-capitalization if its creditors were to demand repayment. Given that Ark Restaurants 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.

Importantly, Ark Restaurants's EBIT fell a jaw-dropping 63% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is Ark Restaurants'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Ark Restaurants may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Ark Restaurants actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Ark Restaurants does have more liabilities than liquid assets, it also has net cash of US$5.46m. The cherry on top was that in converted 133% of that EBIT to free cash flow, bringing in US$6.5m. Despite the cash, we do find Ark Restaurants's level of total liabilities concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Ark Restaurants (1 can't be ignored!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.