Does Shake Shack (NYSE:SHAK) Have A Healthy Balance Sheet?

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 note that Shake Shack Inc. (NYSE:SHAK) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shake Shack

What Is Shake Shack's Net Debt?

The chart below, which you can click on for greater detail, shows that Shake Shack had US$246.4m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$310.9m in cash, so it actually has US$64.4m net cash.

How Strong Is Shake Shack's Balance Sheet?

We can see from the most recent balance sheet that Shake Shack had liabilities of US$175.8m falling due within a year, and liabilities of US$1.02b due beyond that. On the other hand, it had cash of US$310.9m and US$27.8m worth of receivables due within a year. So it has liabilities totalling US$857.7m more than its cash and near-term receivables, combined.

Of course, Shake Shack has a market capitalization of US$5.66b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Shake Shack also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Shake Shack grew its EBIT by 657% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Shake Shack 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Shake Shack has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, Shake Shack burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Shake Shack does have more liabilities than liquid assets, it also has net cash of US$64.4m. And we liked the look of last year's 657% year-on-year EBIT growth. So we are not troubled with Shake Shack's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Shake Shack you should know about.

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.