The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Chanticleer Holdings, Inc. (NASDAQ:BURG) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Chanticleer Holdings
What Is Chanticleer Holdings's Debt?
The image below, which you can click on for greater detail, shows that Chanticleer Holdings had debt of US$7.31m at the end of June 2019, a reduction from US$9.82m over a year. However, it also had US$579.0k in cash, and so its net debt is US$6.73m.
How Healthy Is Chanticleer Holdings's Balance Sheet?
The latest balance sheet data shows that Chanticleer Holdings had liabilities of US$19.9m due within a year, and liabilities of US$18.6m falling due after that. Offsetting this, it had US$579.0k in cash and US$518.9k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$37.4m.
This deficit casts a shadow over the US$5.90m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Chanticleer Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Chanticleer Holdings's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.