Is BJ's Restaurants (NASDAQ:BJRI) Using Debt Sensibly?

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. Importantly, BJ's Restaurants, Inc. (NASDAQ:BJRI) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for BJ's Restaurants

What Is BJ's Restaurants's Debt?

You can click the graphic below for the historical numbers, but it shows that BJ's Restaurants had US$50.0m of debt in September 2022, down from US$71.8m, one year before. However, because it has a cash reserve of US$19.2m, its net debt is less, at about US$30.8m.

How Strong Is BJ's Restaurants' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BJ's Restaurants had liabilities of US$184.8m due within 12 months and liabilities of US$493.7m due beyond that. Offsetting this, it had US$19.2m in cash and US$19.9m in receivables that were due within 12 months. So its liabilities total US$639.5m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$635.1m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BJ's Restaurants can strengthen its balance sheet over time. 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 BJ's Restaurants wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to US$1.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate BJ's Restaurants's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$16m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$16m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for BJ's Restaurants you should know about.

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.

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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.