Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Red Robin Gourmet Burgers's Net Debt?
As you can see below, Red Robin Gourmet Burgers had US$177.0m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$22.8m in cash leading to net debt of about US$154.2m.
A Look At Red Robin Gourmet Burgers' Liabilities
The latest balance sheet data shows that Red Robin Gourmet Burgers had liabilities of US$223.3m due within a year, and liabilities of US$628.7m falling due after that. Offsetting these obligations, it had cash of US$22.8m as well as receivables valued at US$37.2m due within 12 months. So its liabilities total US$792.1m more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$222.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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'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 34%, to US$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Despite the top line growth, Red Robin Gourmet Burgers still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$21m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost US$50m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. For instance, we've identified 1 warning sign for Red Robin Gourmet Burgers that you should be aware of.
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.
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.