Is Carrols Restaurant Group (NASDAQ:TAST) Using Debt Sensibly?

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. Importantly, Carrols Restaurant Group, Inc. (NASDAQ:TAST) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, 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 Carrols Restaurant Group

What Is Carrols Restaurant Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Carrols Restaurant Group had US$464.8m of debt in January 2022, down from US$486.4m, one year before. However, it does have US$29.2m in cash offsetting this, leading to net debt of about US$435.7m.

A Look At Carrols Restaurant Group's Liabilities

According to the last reported balance sheet, Carrols Restaurant Group had liabilities of US$168.6m due within 12 months, and liabilities of US$1.30b due beyond 12 months. On the other hand, it had cash of US$29.2m and US$16.8m worth of receivables due within a year. So it has liabilities totalling US$1.43b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$85.2m 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, Carrols Restaurant Group 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 Carrols Restaurant Group'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, Carrols Restaurant Group reported revenue of US$1.7b, which is a gain of 6.8%, 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, Carrols Restaurant Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$6.5m. 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 lost US$43m in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Carrols Restaurant Group that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.