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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Texas Roadhouse, Inc. (NASDAQ:TXRH), with a market cap of US$3.8b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. TXRH’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TXRH here.
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. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. 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.
Can TXRH meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Texas Roadhouse has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at US$362m, it seems that the business 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 the number you get when you divide current assets by current liabilities.
Although TXRH has no debt on its balance sheet, it still has to meet near-term commitments to meet. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, especially if meeting short-term obligations lead to more pressing issues. I admit this is a fairly basic analysis for TXRH's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Texas Roadhouse to get a more holistic view of the mid-cap by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org. 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.