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

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, Carrols Restaurant Group, Inc. (NASDAQ:TAST) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Carrols Restaurant Group

What Is Carrols Restaurant Group's Net Debt?

As you can see below, Carrols Restaurant Group had US$490.3m of debt at July 2022, down from US$514.9m a year prior. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Carrols Restaurant Group's Balance Sheet?

The latest balance sheet data shows that Carrols Restaurant Group had liabilities of US$161.2m due within a year, and liabilities of US$1.30b falling due after that. On the other hand, it had cash of US$8.07m and US$20.4m 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$106.0m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Carrols Restaurant Group would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Carrols Restaurant 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.

In the last year Carrols Restaurant Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.3%, to US$1.7b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Carrols Restaurant Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$53m. 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. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through US$29m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Carrols Restaurant Group has 3 warning signs we think 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.

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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.