Would BJ's Restaurants (NASDAQ:BJRI) Be Better Off With Less 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. We can see that BJ's Restaurants, Inc. (NASDAQ:BJRI) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for BJ's Restaurants

How Much Debt Does BJ's Restaurants Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 BJ's Restaurants had US$561.8m of debt, an increase on US$126.8m, over one year. On the flip side, it has US$88.0m in cash leading to net debt of about US$473.9m.

A Look At BJ's Restaurants' Liabilities

Zooming in on the latest balance sheet data, we can see that BJ's Restaurants had liabilities of US$196.2m due within 12 months and liabilities of US$537.8m due beyond that. Offsetting these obligations, it had cash of US$88.0m as well as receivables valued at US$25.1m due within 12 months. So it has liabilities totalling US$620.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$772.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine BJ's Restaurants's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year BJ's Restaurants wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$993m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, BJ's Restaurants had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$24m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$17m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example BJ's Restaurants has 4 warning signs (and 1 which is a bit unpleasant) we think 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.

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.

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