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What Investors Should Know About Shake Shack Inc.'s (NYSE:SHAK) Financial Strength

Simply Wall St

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Shake Shack Inc. (NYSE:SHAK) is a small-cap stock with a market capitalization of US$2.3b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into SHAK here.

Does SHAK Produce Much Cash Relative To Its Debt?

SHAK's debt levels surged from US$17m to US$296m over the last 12 months , which accounts for long term debt. With this increase in debt, SHAK's cash and short-term investments stands at US$80m to keep the business going. Moreover, SHAK has produced cash from operations of US$83m over the same time period, resulting in an operating cash to total debt ratio of 28%, meaning that SHAK’s operating cash is sufficient to cover its debt.

Can SHAK pay its short-term liabilities?

With current liabilities at US$79m, it seems that the business has been able to meet these commitments with a current assets level of US$92m, leading to a 1.17x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Hospitality companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:SHAK Historical Debt, June 3rd 2019

Can SHAK service its debt comfortably?

With total debt exceeding equity, SHAK is considered a highly levered company. 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 test if SHAK’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SHAK, the ratio of 41.66x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although SHAK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how SHAK has been performing in the past. I suggest you continue to research Shake Shack to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SHAK’s future growth? Take a look at our free research report of analyst consensus for SHAK’s outlook.
  2. Valuation: What is SHAK 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 SHAK 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.