Does Fiesta Restaurant Group (NASDAQ:FRGI) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Fiesta Restaurant Group, Inc. (NASDAQ:FRGI) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 Fiesta Restaurant Group

What Is Fiesta Restaurant Group's Debt?

As you can see below, Fiesta Restaurant Group had US$72.4m of debt at July 2021, down from US$148.2m a year prior. On the flip side, it has US$65.8m in cash leading to net debt of about US$6.52m.

How Healthy Is Fiesta Restaurant Group's Balance Sheet?

The latest balance sheet data shows that Fiesta Restaurant Group had liabilities of US$232.4m due within a year, and liabilities of US$179.9m falling due after that. Offsetting this, it had US$65.8m in cash and US$7.19m in receivables that were due within 12 months. So its liabilities total US$339.4m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$305.1m, we think shareholders really should watch Fiesta Restaurant Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Given net debt is only 0.14 times EBITDA, it is initially surprising to see that Fiesta Restaurant Group's EBIT has low interest coverage of 2.0 times. So one way or the other, it's clear the debt levels are not trivial. Notably, Fiesta Restaurant Group made a loss at the EBIT level, last year, but improved that to positive EBIT of US$9.5m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fiesta Restaurant Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Fiesta Restaurant Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

We feel some trepidation about Fiesta Restaurant Group's difficulty interest cover, but we've got positives to focus on, too. To wit both its conversion of EBIT to free cash flow and net debt to EBITDA were encouraging signs. Looking at all the angles mentioned above, it does seem to us that Fiesta Restaurant Group is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Fiesta Restaurant Group (1 makes us a bit uncomfortable!) 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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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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