Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ruth's Hospitality Group, Inc. (NASDAQ:RUTH) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Ruth's Hospitality Group's Net Debt?
As you can see below, Ruth's Hospitality Group had US$70.0m of debt at June 2021, down from US$135.2m a year prior. But it also has US$87.3m in cash to offset that, meaning it has US$17.3m net cash.NasdaqGS:RUTH Debt to Equity History October 13th 2021
How Healthy Is Ruth's Hospitality Group's Balance Sheet?
According to the last reported balance sheet, Ruth's Hospitality Group had liabilities of US$110.4m due within 12 months, and liabilities of US$263.7m due beyond 12 months. On the other hand, it had cash of US$87.3m and US$15.9m worth of receivables due within a year. So it has liabilities totalling US$270.8m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Ruth's Hospitality Group is worth US$658.8m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Ruth's Hospitality Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Ruth's Hospitality Group grew its EBIT by 251% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ruth's Hospitality Group'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Ruth's Hospitality Group 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. Over the last three years, Ruth's Hospitality Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While Ruth's Hospitality Group does have more liabilities than liquid assets, it also has net cash of US$17.3m. The cherry on top was that in converted 129% of that EBIT to free cash flow, bringing in US$60m. So is Ruth's Hospitality Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Ruth's Hospitality Group is showing 1 warning sign in our investment analysis , 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.
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.
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