Would Ruth's Hospitality Group (NASDAQ:RUTH) Be Better Off With Less Debt?

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 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 Ruth's Hospitality Group, Inc. (NASDAQ:RUTH) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Ruth's Hospitality Group

How Much Debt Does Ruth's Hospitality Group Carry?

As you can see below, Ruth's Hospitality Group had US$115.0m of debt at March 2021, down from US$145.0m a year prior. On the flip side, it has US$112.3m in cash leading to net debt of about US$2.68m.

How Strong Is Ruth's Hospitality Group's Balance Sheet?

We can see from the most recent balance sheet that Ruth's Hospitality Group had liabilities of US$103.2m falling due within a year, and liabilities of US$323.6m due beyond that. Offsetting these obligations, it had cash of US$112.3m as well as receivables valued at US$16.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$298.2m.

While this might seem like a lot, it is not so bad since Ruth's Hospitality Group has a market capitalization of US$742.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. But either way, Ruth's Hospitality Group has virtually no net debt, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ruth's Hospitality Group 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.

Over 12 months, Ruth's Hospitality Group made a loss at the EBIT level, and saw its revenue drop to US$256m, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ruth's Hospitality Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost US$4.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$12m. So to be blunt we do think it is 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 4 warning signs for Ruth's Hospitality Group that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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