These 4 Measures Indicate That Shake Shack (NYSE:SHAK) Is Using Debt Reasonably Well

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 is this debt a concern to shareholders?

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When Is Debt A Problem?

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 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.

What Is Shake Shack's Net Debt?

As you can see below, Shake Shack had US$246.7m of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$320.7m in cash, leading to a US$74.0m net cash position.

A Look At Shake Shack's Liabilities

The latest balance sheet data shows that Shake Shack had liabilities of US$187.3m due within a year, and liabilities of US$1.02b falling due after that. Offsetting these obligations, it had cash of US$320.7m as well as receivables valued at US$32.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$850.2m.

Shake Shack has a market capitalization of US$4.07b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

View our latest analysis for Shake Shack

Even more impressive was the fact that Shake Shack grew its EBIT by 302% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Shake Shack's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Shake Shack 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. In the last two years, Shake Shack's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Shake Shack'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$74.0m. And it impressed us with its EBIT growth of 302% over the last year. So is Shake Shack's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shake Shack you should know about.

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.