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, Flanigan's Enterprises, Inc. (NYSEMKT:BDL) does carry debt. But the more important question is: how much risk is that debt creating?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Flanigan's Enterprises's Net Debt?
The image below, which you can click on for greater detail, shows that Flanigan's Enterprises had debt of US$13.8m at the end of June 2019, a reduction from US$15.3m over a year. However, it does have US$12.5m in cash offsetting this, leading to net debt of about US$1.30m.
How Healthy Is Flanigan's Enterprises's Balance Sheet?
According to the last reported balance sheet, Flanigan's Enterprises had liabilities of US$15.5m due within 12 months, and liabilities of US$8.96m due beyond 12 months. On the other hand, it had cash of US$12.5m and US$636.0k worth of receivables due within a year. So it has liabilities totalling US$11.3m more than its cash and near-term receivables, combined.
Flanigan's Enterprises has a market capitalization of US$41.8m, so it could very likely raise cash to ameliorate 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.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Flanigan's Enterprises has net debt of just 0.15 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 8.7 times the interest expense over the last year. The modesty of its debt load may become crucial for Flanigan's Enterprises if management cannot prevent a repeat of the 21% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Flanigan's Enterprises will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Flanigan's Enterprises's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Flanigan's Enterprises's EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its net debt to EBITDA was re-invigorating. Looking at all the angles mentioned above, it does seem to us that Flanigan's Enterprises is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Flanigan's Enterprises's earnings per share history for free.
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.
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