We Think RAVE Restaurant Group (NASDAQ:RAVE) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that RAVE Restaurant Group, Inc. (NASDAQ:RAVE) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for RAVE Restaurant Group

What Is RAVE Restaurant Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that RAVE Restaurant Group had US$1.68m of debt in December 2021, down from US$2.22m, one year before. But it also has US$8.23m in cash to offset that, meaning it has US$6.55m net cash.

A Look At RAVE Restaurant Group's Liabilities

According to the last reported balance sheet, RAVE Restaurant Group had liabilities of US$3.72m due within 12 months, and liabilities of US$2.54m due beyond 12 months. Offsetting these obligations, it had cash of US$8.23m as well as receivables valued at US$1.53m due within 12 months. So it actually has US$3.50m more liquid assets than total liabilities.

This surplus suggests that RAVE Restaurant Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, RAVE Restaurant Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that RAVE Restaurant Group grew its EBIT by 363% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is RAVE Restaurant Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While RAVE Restaurant Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, RAVE Restaurant Group recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case RAVE Restaurant Group has US$6.55m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 363% over the last year. So we don't think RAVE Restaurant Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for RAVE Restaurant Group (1 is a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.