Does Texas Roadhouse (NASDAQ:TXRH) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Texas Roadhouse, Inc. (NASDAQ:TXRH) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Texas Roadhouse

What Is Texas Roadhouse's Net Debt?

The image below, which you can click on for greater detail, shows that Texas Roadhouse had debt of US$190.0m at the end of June 2021, a reduction from US$240.0m over a year. But on the other hand it also has US$483.4m in cash, leading to a US$293.4m net cash position.

A Look At Texas Roadhouse's Liabilities

Zooming in on the latest balance sheet data, we can see that Texas Roadhouse had liabilities of US$479.8m due within 12 months and liabilities of US$906.5m due beyond that. On the other hand, it had cash of US$483.4m and US$48.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$854.2m.

Of course, Texas Roadhouse has a market capitalization of US$6.38b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Texas Roadhouse also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Texas Roadhouse grew its EBIT by 242% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Texas Roadhouse can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Texas Roadhouse may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Texas Roadhouse actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

Although Texas Roadhouse's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$293.4m. And it impressed us with free cash flow of US$308m, being 114% of its EBIT. So we don't think Texas Roadhouse's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Texas Roadhouse you should know about.

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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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