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Is Texas Roadhouse, Inc.'s (NASDAQ:TXRH) Liquidity Good Enough?

Simply Wall St

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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Texas Roadhouse, Inc. (NASDAQ:TXRH), with a market cap of US$3.8b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at TXRH’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into TXRH here.

View our latest analysis for Texas Roadhouse

Can TXRH service its debt comfortably?

What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For TXRH, the debt-to-equity ratio is zero, meaning that the company has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with TXRH, and the company has plenty of headroom and ability to raise debt should it need to in the future.

NasdaqGS:TXRH Historical Debt, June 27th 2019

Can TXRH meet its short-term obligations with the cash in hand?

Since Texas Roadhouse doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at TXRH’s US$362m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.89x. The current ratio is calculated by dividing current assets by current liabilities.

Next Steps:

Though TXRH has zero debt obligations, it still has short term liabilities such as salaries to pay. Shareholders should understand why the company isn't opting for cheaper cost of capital to fund future growth, especially if meeting short-term obligations lead to more pressing issues. This is only a rough assessment of financial health, and I'm sure TXRH has company-specific issues impacting its capital structure decisions. I suggest you continue to research Texas Roadhouse to get a more holistic view of the mid-cap by looking at:

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