Is Good Times Restaurants (NASDAQ:GTIM) A Risky Investment?

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 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. We note that Good Times Restaurants Inc. (NASDAQ:GTIM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. 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 Debt?

As you can see below, at the end of April 2025, Good Times Restaurants had US$2.61m of debt, up from US$1.25m a year ago. Click the image for more detail. However, it does have US$2.71m in cash offsetting this, leading to net cash of US$107.0k.

How Healthy Is Good Times Restaurants' Balance Sheet?

We can see from the most recent balance sheet that Good Times Restaurants had liabilities of US$15.6m falling due within a year, and liabilities of US$39.0m due beyond that. Offsetting these obligations, it had cash of US$2.71m as well as receivables valued at US$786.0k due within 12 months. So it has liabilities totalling US$51.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$18.0m 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. Good Times Restaurants boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

View our latest analysis for Good Times Restaurants

But the other side of the story is that Good Times Restaurants saw its EBIT decline by 6.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Good Times Restaurants may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Good Times Restaurants recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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$107.0k. And it impressed us with free cash flow of -US$503k, being 100% of its EBIT. So while Good Times Restaurants does not have a great balance sheet, it's certainly not too bad. 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 - Good Times Restaurants has 2 warning signs we think 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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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.