Red Robin Gourmet Burgers (NASDAQ:RRGB) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Red Robin Gourmet Burgers

What Is Red Robin Gourmet Burgers's Debt?

As you can see below, at the end of April 2022, Red Robin Gourmet Burgers had US$194.4m of debt, up from US$164.2m a year ago. Click the image for more detail. However, it also had US$33.8m in cash, and so its net debt is US$160.7m.

How Healthy Is Red Robin Gourmet Burgers' Balance Sheet?

According to the last reported balance sheet, Red Robin Gourmet Burgers had liabilities of US$202.1m due within 12 months, and liabilities of US$627.6m due beyond 12 months. On the other hand, it had cash of US$33.8m and US$25.8m worth of receivables due within a year. So it has liabilities totalling US$770.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$160.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Red Robin Gourmet Burgers would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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$1.2b, which is a gain of 39%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Red Robin Gourmet Burgers's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$11m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through US$4.9m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. Be aware that Red Robin Gourmet Burgers is showing 2 warning signs in our investment analysis , you should know about...

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.