Consumer services

Is Ark Restaurants (NASDAQ:ARKR) a risky investment?

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Ark Restaurants Corp. (NASDAQ:ARKR) has debt on its balance sheet. But does this debt worry shareholders?

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. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Ark Restaurants

What is Ark Restaurants’ net debt?

The image below, which you can click on for more details, shows Ark Restaurants had $24.9 million in debt at the end of July 2022, a reduction from $36.8 million year-over-year . However, he has $26.6 million in cash to offset this, which translates to a net cash of $1.71 million.

NasdaqGM:ARKR Debt to Equity September 24, 2022

How strong are Ark restaurants’ balance sheets?

According to the last published balance sheet, Ark Restaurants had liabilities of $33.5 million maturing within 12 months and liabilities of $89.8 million maturing beyond 12 months. On the other hand, it had $26.6 million in cash and $5.02 million in receivables within one year. Thus, its liabilities total $91.7 million more than the combination of its cash and short-term receivables.

When you consider that shortfall exceeds the company’s US$63.6 million market capitalization, you might well be inclined to take a close look at the balance sheet. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution. Ark Restaurants has net cash, so it’s fair to say that it doesn’t have a lot of debt, even though it has very large liabilities, in total.

It was also good to see that despite losing money on the EBIT line last year, Ark Restaurants turned things around over the last 12 months, delivering an EBIT of US$14 million. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Ark Restaurants that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Ark Restaurants has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that money. balance. Fortunately for all shareholders, Ark Restaurants has actually produced more free cash flow than EBIT over the past year. This kind of high cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summary

Although Ark Restaurants’ balance sheet is not particularly strong, due to total liabilities, it is clearly positive to see that it has a net cash position of $1.71 million. And it impressed us with free cash flow of $16 million, or 112% of its EBIT. We therefore have no problem with the use of debt by Ark Restaurants. 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. Know that Ark Restaurants shows 3 warning signs in our investment analysis you should know…

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.

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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