Is Fiesta Restaurant Group (NASDAQ:FRGI) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Fiesta Restaurant Group, Inc. (NASDAQ:FRGI) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Fiesta Restaurant Group

What Is Fiesta Restaurant Group's Net Debt?

The image below, which you can click on for greater detail, shows that Fiesta Restaurant Group had debt of US$71.5m at the end of January 2021, a reduction from US$75.0m over a year. However, it also had US$50.0m in cash, and so its net debt is US$21.5m.

How Strong Is Fiesta Restaurant Group's Balance Sheet?

We can see from the most recent balance sheet that Fiesta Restaurant Group had liabilities of US$64.9m falling due within a year, and liabilities of US$356.1m due beyond that. On the other hand, it had cash of US$50.0m and US$18.3m worth of receivables due within a year. So its liabilities total US$352.6m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$331.2m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fiesta Restaurant Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Fiesta Restaurant Group made a loss at the EBIT level, and saw its revenue drop to US$555m, which is a fall of 16%. That's not what we would hope to see.

Caveat Emptor

While Fiesta Restaurant Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$1.1m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of US$10m. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Fiesta Restaurant Group , and understanding them should be part of your investment process.

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. 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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