Is FAT Brands (NASDAQ:FAT) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, FAT Brands Inc. (NASDAQ:FAT) does carry debt. But is this debt a concern to shareholders?

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. 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.

Check out our latest analysis for FAT Brands

What Is FAT Brands's Net Debt?

As you can see below, at the end of September 2020, FAT Brands had US$88.0m of debt, up from US$44.1m a year ago. Click the image for more detail. On the flip side, it has US$12.1m in cash leading to net debt of about US$75.8m.

How Strong Is FAT Brands' Balance Sheet?

According to the last reported balance sheet, FAT Brands had liabilities of US$31.9m due within 12 months, and liabilities of US$104.8m due beyond 12 months. Offsetting this, it had US$12.1m in cash and US$4.66m in receivables that were due within 12 months. So its liabilities total US$119.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$141.1m, so it does suggest shareholders should keep an eye on FAT Brands' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine FAT Brands'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 FAT Brands had a loss before interest and tax, and actually shrunk its revenue by 22%, to US$17m. To be frank that doesn't bode well.

Caveat Emptor

Not only did FAT Brands'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$2.2m. 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. Another cause for caution is that is bled US$5.9m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. Case in point: We've spotted 2 warning signs for FAT Brands you should be aware of.

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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