Is Red Robin Gourmet Burgers (NASDAQ:RRGB) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Red Robin Gourmet Burgers

What Is Red Robin Gourmet Burgers's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Red Robin Gourmet Burgers had debt of US$206.5m, up from US$177.0m in one year. However, because it has a cash reserve of US$48.8m, its net debt is less, at about US$157.7m.

How Strong Is Red Robin Gourmet Burgers' Balance Sheet?

The latest balance sheet data shows that Red Robin Gourmet Burgers had liabilities of US$216.6m due within a year, and liabilities of US$610.1m falling due after that. Offsetting this, it had US$48.8m in cash and US$22.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$756.0m.

This deficit casts a shadow over the US$221.6m 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 it is future earnings, more than anything, that will determine Red Robin Gourmet Burgers's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Red Robin Gourmet Burgers reported revenue of US$1.3b, which is a gain of 9.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Red Robin Gourmet Burgers had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$22m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$2.6m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Red Robin Gourmet Burgers has 1 warning sign we think you should be aware of.

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. 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.