Is Fiesta Restaurant Group (NASDAQ:FRGI) Weighed On By Its Debt Load?

Warren Buffett famously said, '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. Importantly, Fiesta Restaurant Group, Inc. (NASDAQ:FRGI) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fiesta Restaurant Group

How Much Debt Does Fiesta Restaurant Group Carry?

You can click the graphic below for the historical numbers, but it shows that Fiesta Restaurant Group had US$39.9m of debt in September 2020, down from US$69.0m, one year before. However, because it has a cash reserve of US$18.0m, its net debt is less, at about US$21.9m.

A Look At Fiesta Restaurant Group's Liabilities

According to the last reported balance sheet, Fiesta Restaurant Group had liabilities of US$80.9m due within 12 months, and liabilities of US$324.9m due beyond 12 months. Offsetting these obligations, it had cash of US$18.0m as well as receivables valued at US$19.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$368.3m.

Given this deficit is actually higher than the company's market capitalization of US$313.4m, 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Fiesta Restaurant Group had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$565m. 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$7.8m 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$32m. In the meantime, we consider the stock to be 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Fiesta Restaurant Group , and understanding them should be part of your investment process.

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. 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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