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Is Del Taco Restaurants, Inc.'s (NASDAQ:TACO) Balance Sheet A Threat To Its Future?

Simply Wall St

Investors are always looking for growth in small-cap stocks like Del Taco Restaurants, Inc. (NASDAQ:TACO), with a market cap of US$423m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into TACO here.

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TACO’s Debt (And Cash Flows)

TACO's debt levels surged from US$173m to US$393m over the last 12 months , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$9.0m , ready to be used for running the business. Additionally, TACO has generated cash from operations of US$59m over the same time period, resulting in an operating cash to total debt ratio of 15%, indicating that TACO’s current level of operating cash is not high enough to cover debt.

Does TACO’s liquid assets cover its short-term commitments?

At the current liabilities level of US$73m, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$20m, with a current ratio of 0.28x. The current ratio is the number you get when you divide current assets by current liabilities.

NasdaqCM:TACO Historical Debt, May 21st 2019

Does TACO face the risk of succumbing to its debt-load?

With debt reaching 93% of equity, TACO may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether TACO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TACO's, case, the ratio of 4.19x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving TACO ample headroom to grow its debt facilities.

Next Steps:

Although TACO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how TACO has been performing in the past. I recommend you continue to research Del Taco Restaurants to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TACO’s future growth? Take a look at our free research report of analyst consensus for TACO’s outlook.
  2. Valuation: What is TACO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether TACO is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.