Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Texas Roadhouse, Inc. (NASDAQ:TXRH) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
How Much Debt Does Texas Roadhouse Carry?
As you can see below, Texas Roadhouse had US$190.0m of debt at June 2021, down from US$240.0m a year prior. However, it does have US$483.4m in cash offsetting this, leading to net cash of US$293.4m.
A Look At Texas Roadhouse's Liabilities
The latest balance sheet data shows that Texas Roadhouse had liabilities of US$479.8m due within a year, and liabilities of US$906.5m falling due after that. Offsetting these obligations, it had cash of US$483.4m as well as receivables valued at US$48.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$854.2m.
Given Texas Roadhouse has a market capitalization of US$6.67b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Texas Roadhouse also has more cash than debt, so we're pretty confident it can manage its debt safely.
Better yet, Texas Roadhouse grew its EBIT by 242% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Texas Roadhouse can strengthen its balance sheet over time. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Texas Roadhouse actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
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$293.4m. And it impressed us with free cash flow of US$308m, being 114% of its EBIT. So we don't think Texas Roadhouse's use of debt 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. To that end, you should be aware of the 1 warning sign we've spotted with Texas Roadhouse .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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