Health Check: How Prudently Does Red Robin Gourmet Burgers (NASDAQ:RRGB) Use Debt?

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.' 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 can see that Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out the opportunities and risks within the US Hospitality industry.

How Much Debt Does Red Robin Gourmet Burgers Carry?

The image below, which you can click on for greater detail, shows that at October 2022 Red Robin Gourmet Burgers had debt of US$191.3m, up from US$157.2m in one year. On the flip side, it has US$50.0m in cash leading to net debt of about US$141.3m.

How Strong Is Red Robin Gourmet Burgers' Balance Sheet?

The latest balance sheet data shows that Red Robin Gourmet Burgers had liabilities of US$205.6m due within a year, and liabilities of US$603.7m falling due after that. Offsetting these obligations, it had cash of US$50.0m as well as receivables valued at US$12.7m due within 12 months. So its liabilities total US$746.6m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$114.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Red Robin Gourmet Burgers would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Red Robin Gourmet Burgers 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.

In the last year Red Robin Gourmet Burgers wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to US$1.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Red Robin Gourmet Burgers produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$21m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through US$835k in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Red Robin Gourmet Burgers , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.