Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies BJ’s Restaurants, Inc. (NASDAQ:BJRI) uses debt. But should shareholders worry about its use of debt?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest review for BJ’s Restaurants
What is BJ’s Restaurants debt?
The image below, which you can click on for more details, shows that as of September 2021, BJ’s Restaurants had $555.2 million in debt, up from $116.8 million in one year. However, since he has a cash reserve of $59.8 million, his net debt is less, at around $495.4 million.
A look at the responsibilities of BJ’s Restaurants
We can see from the most recent balance sheet that BJ’s Restaurants had liabilities of $174.8 million due in one year and liabilities of $530.9 million beyond. In return, it had $59.8 million in cash and $24.4 million in receivables due within 12 months. It therefore has liabilities totaling $621.5 million more than its cash and short-term receivables, combined.
This shortfall is sizable relative to its market capitalization of US$733.6 million, so he suggests shareholders watch BJ’s Restaurants’ use of debt. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether BJ’s Restaurants 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.
Year-over-year, BJ’s Restaurants reported revenue of US$1.1 billion, a 39% gain, although it reported no earnings before interest and taxes. The shareholders probably have their fingers crossed that she can make a profit.
Caveat Emptor
Even though BJ’s Restaurants has managed to grow its revenue quite slickly, the hard truth is that it is losing money on the EBIT line. Indeed, it lost $13 million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. Quite frankly, we think the track record falls short, although it could improve over time. For example, we wouldn’t want to see a repeat of last year’s US$3.6 million loss. So, to be frank, we think it’s risky. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 2 warning signs for BJ’s Restaurants you should be aware of, and 1 of them is significant.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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