Good Times Restaurants (NASDAQ:GTIM) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Good Times Restaurants Inc. (NASDAQ:GTIM) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Good Times Restaurants's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 Good Times Restaurants had debt of US$2.61m, up from US$1.25m in one year. But on the other hand it also has US$3.02m in cash, leading to a US$411.0k net cash position.

A Look At Good Times Restaurants' Liabilities

We can see from the most recent balance sheet that Good Times Restaurants had liabilities of US$15.8m falling due within a year, and liabilities of US$40.7m due beyond that. On the other hand, it had cash of US$3.02m and US$1.05m worth of receivables due within a year. So it has liabilities totalling US$52.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$23.7m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Good Times Restaurants would probably need a major re-capitalization if its creditors were to demand repayment. Given that Good Times Restaurants has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

See our latest analysis for Good Times Restaurants

Fortunately, Good Times Restaurants grew its EBIT by 7.5% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Good Times Restaurants will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Good Times Restaurants has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Good Times Restaurants actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Good Times Restaurants's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$411.0k. And it impressed us with free cash flow of US$754k, being 109% of its EBIT. So we don't have any problem with Good Times Restaurants's use of debt. 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. We've identified 2 warning signs with Good Times Restaurants , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.