Warren Buffett said: “Volatility is far from synonymous with risk”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Texas Roadhouse, Inc. (NASDAQ: TXRH) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for Texas Roadhouse
How much debt does the Texas Roadhouse have?
As you can see below, Texas Roadhouse had a debt of US $ 190.0 million in June 2021, up from US $ 240.0 million the year before. However, it has $ 483.4 million in cash offsetting this, which leads to a net cash of $ 293.4 million.
A look at the responsibilities of Texas Roadhouse
The latest balance sheet data shows that Texas Roadhouse had liabilities of US $ 479.8 million due within one year, and liabilities of US $ 906.5 million due thereafter. In compensation for these obligations, it had cash of US $ 483.4 million as well as receivables valued at US $ 48.6 million due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 854.2 million.
Considering that Texas Roadhouse has a market cap of US $ 6.67 billion, it’s hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While it has some liabilities to note, Texas Roadhouse also has more cash than debt, so we’re pretty confident it can handle its debt safely.
Best of all, Texas Roadhouse increased its EBIT by 242% last year, which is an impressive improvement. This boost will make it even easier to pay down debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Texas Roadhouse can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. Texas Roadhouse may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Fortunately for all shareholders, Texas Roadhouse has actually generated more free cash flow than EBIT over the past three years. There is nothing better than cash flow to stay in the good graces of your lenders.
While Texas Roadhouse’s balance sheet is not particularly strong, due to total liabilities it is clearly positive that it has net cash of US $ 293.4 million. And he impressed us with free cash flow of US $ 308 million, or 114% of his EBIT. We therefore do not believe that Texas Roadhouse’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 1 warning sign we spotted with Texas Roadhouse.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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