Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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. As with many other companies The Cheesecake Factory Incorporated (NASDAQ:CAKE) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Cheesecake Factory
What Is Cheesecake Factory’s Debt?
As you can see below, at the end of June 2020, Cheesecake Factory had US$376.0m of debt, up from US$35.0m a year ago. Click the image for more detail. However, it does have US$250.2m in cash offsetting this, leading to net debt of about US$125.8m.
How Healthy Is Cheesecake Factory’s Balance Sheet?
According to the last reported balance sheet, Cheesecake Factory had liabilities of US$532.7m due within 12 months, and liabilities of US$1.78b due beyond 12 months. Offsetting these obligations, it had cash of US$250.2m as well as receivables valued at US$127.6m due within 12 months. So its liabilities total US$1.93b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the US$1.27b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we’d watch its balance sheet closely, without a doubt. After all, Cheesecake Factory would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cheesecake Factory can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Cheesecake Factory made a loss at the EBIT level, and saw its revenue drop to US$2.2b, which is a fall of 7.2%. We would much prefer see growth.
Caveat Emptor
Importantly, Cheesecake Factory had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$25m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It’s fair to say the loss of US$142m didn’t encourage us either; we’d like to see a profit. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we’ve identified 2 warning signs for Cheesecake Factory that you should be aware of.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
Promoted
If you’re looking to trade Cheesecake Factory, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected].
Discounted cash flow calculation for every stock
Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.
