Is Texas Roadhouse (NASDAQ:TXRH) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Texas Roadhouse, Inc. (NASDAQ:TXRH) does carry debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Texas Roadhouse

What Is Texas Roadhouse's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Texas Roadhouse had US$50.0m of debt in December 2022, down from US$100.0m, one year before. But it also has US$173.9m in cash to offset that, meaning it has US$123.9m net cash.

A Look At Texas Roadhouse's Liabilities

Zooming in on the latest balance sheet data, we can see that Texas Roadhouse had liabilities of US$652.0m due within 12 months and liabilities of US$846.0m due beyond that. On the other hand, it had cash of US$173.9m and US$150.3m worth of receivables due within a year. So it has liabilities totalling US$1.17b more than its cash and near-term receivables, combined.

Given Texas Roadhouse has a market capitalization of US$7.37b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Texas Roadhouse boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Texas Roadhouse has increased its EBIT by 8.2% over twelve months, which should ease any concerns about debt repayment. 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 Texas Roadhouse'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Texas Roadhouse may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Texas Roadhouse recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Texas Roadhouse's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$123.9m. And it impressed us with free cash flow of US$266m, being 94% of its EBIT. So we don't think Texas Roadhouse's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Texas Roadhouse that you should be aware of.

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.