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, Shake Shack Inc. (NYSE:SHAK) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Shake Shack's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Shake Shack had US$243.3m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$401.5m in cash, so it actually has US$158.2m net cash.
How Strong Is Shake Shack's Balance Sheet?
According to the last reported balance sheet, Shake Shack had liabilities of US$118.3m due within 12 months, and liabilities of US$878.8m due beyond 12 months. Offsetting this, it had US$401.5m in cash and US$11.3m in receivables that were due within 12 months. So it has liabilities totalling US$584.2m more than its cash and near-term receivables, combined.
Of course, Shake Shack has a market capitalization of US$3.12b, 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. 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.
Over 12 months, Shake Shack reported revenue of US$694m, which is a gain of 34%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Shake Shack?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Shake Shack had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$38m and booked a US$18m accounting loss. With only US$158.2m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Shake Shack may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Shake Shack I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.