Health Check: How Cautiously Are Ark Restaurants (NASDAQ: ARKR) Using Debt?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Ark Restaurants Corp. (NASDAQ: ARKR) uses debt. But should shareholders be concerned about its use of debt?
When Is Debt a Problem?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, 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 ruthlessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is the net debt of Ark restaurants?
You can click on the graph below for historical figures, but it shows that in January 2021, Ark Restaurants had a debt of US $ 45.4 million, an increase from US $ 25.8 million. , over one year. However, because it has a cash reserve of US $ 10.8 million, its net debt is less, at around US $ 34.6 million.
NasdaqGM: ARKR History of debt to equity April 7, 2021
A look at the responsibilities of Ark restaurants
We can see from the most recent balance sheet that Ark Restaurants had $ 24.4 million in debt due within one year and $ 97.9 million in debt due beyond. In return, he had $ 10.8 million in cash and $ 2.82 million in receivables due within 12 months. It therefore has a liability totaling US $ 108.7 million more than its combined cash and short-term receivables.
Given that this deficit is actually greater than the company’s market cap of $ 77.3 million, we think shareholders should really watch Ark Restaurants’ debt levels, like a parent watching their child. riding a bike for the first time. Hypothetically, extremely high dilution would be required if the company was forced to repay its debts by raising capital at the current share price. The balance sheet is clearly the area you need to focus on when analyzing debt. But you can’t look at debt in isolation; since Ark Restaurants will need income to repay this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, Ark Restaurants recorded a loss in EBIT and saw its turnover fall to 83 million US dollars, a decrease of 50%. To be frank, that doesn’t bode well.
While Ark Restaurants’s decline in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Indeed, he lost 13 million US dollars very significant in terms of EBIT. Considering that aside from the liabilities mentioned above, we are nervous about the business. It would have to improve its operation quickly for us to take an interest in it. Notably because it has burned $ 12 million in negative free cash flow over the past year. So suffice to say that we consider the title to be risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. Be aware that Ark Restaurants shows 3 warning signs in our investment analysis , and 2 of them don’t sit too well with us …
Of course, if you are the kind of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.
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