Continue to hold Arcos (NYSE:ARCO) based on its current debt obligations?

ARCO Stock

USD 8.43 0.18 2.09%

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Arcos Dorados Holdings is scheduled to announce its earnings today. As many millenniums are trying to avoid consumer cyclical space, it makes sense to outline Arcos Dorados Holdings a little further and try to understand its current market patterns. Let's try to inspect if Arcos Dorados shares are reasonably priced going into December.

Published over two months ago

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Arcos Dorados Holdings currently holds 1.58 B in liabilities with Debt to Equity (D/E) ratio of 7.4, indicating Arcos Dorados may have difficulties to generate enough cash to satisfy its financial obligations. The entity has a current ratio of 0.84, indicating that it has a negative working capital and may not be able to pay financial obligations when due. Debt can assist Arcos Dorados until it has trouble settling it off, either with new capital or with free cash flow. So, Arcos Dorados' shareholders could walk away with nothing if the company can't fulfill its legal obligations to repay debt. However, a more frequent occurrence is when companies like Arcos Dorados Holdings sell additional shares at bargain prices, diluting existing shareholders. Debt, in this case, can be an excellent and much better tool for Arcos to invest in growth at high rates of return. When we think about Arcos Dorados' use of debt, we should always consider it together with cash and equity.

Continue to hold Arcos (NYSE:ARCO) based on its current debt obligations?

Arcos Dorados financial leverage ratio helps determine the effect of debt on the overall profitability of the company. It measures the total debt position of Arcos Dorados, including all of Arcos Dorados's outstanding debt obligations, and compares it with the equity. In simple terms, the high financial leverage means the cost of production, together with running the business day-to-day, is high, whereas, lower financial leverage implies lower fixed cost investment in the business and generally considered by investors to be a good sign. So if creditors own a majority of Arcos Dorados assets, the company is considered highly leveraged. Understanding the composition and structure of overall Arcos Dorados debt and outstanding corporate bonds gives a good idea of how risky the capital structure of a business is and if it is worth investing in it.

Please read more on our technical analysis page.

How important is Arcos Dorados's Liquidity

Arcos Dorados financial leverage refers to using borrowed capital as a funding source to finance Arcos Dorados Holdings ongoing operations. It is usually used to expand the firm's asset base and generate returns on borrowed capital. Arcos Dorados financial leverage is typically calculated by taking the company's all interest-bearing debt and dividing it by total capital. So the higher the debt-to-capital ratio (i.e., financial leverage), the riskier the company. Please check the breakdown between Arcos Dorados's total debt and its cash.

How does Arcos utilize its cash?

To perform a cash flow analysis of Arcos Dorados, investors first need to understand how to read the cash flow statement. A cash flow statement shows the amount of cash Arcos Dorados is receiving and how much cash it distributes out in a given period. The Arcos Dorados cash flow statement breaks down these inflows and outflows into different buckets, including operating activities, investing activities, and financing activities.

Is Arcos Dorados valued appropriately by the market?

The latest indifference towards the small price fluctuations of Arcos Dorados Holdings could raise concerns from institutional investors as the firm is trading at a share price of 7.21 on 2,814,414 in volume. The company management teams did not add any value to Arcos Dorados investors in October. However, most investors can still diversify their portfolios with Arcos Dorados Holdings to hedge their inherited risk against high-volatility market scenarios. The stock standard deviation of daily returns for 90 days investing horizon is currently 2.48. The current volatility is consistent with the ongoing market swings in October 2022 as well as with Arcos Dorados unsystematic, company-specific events.

Our take on Arcos Dorados small slide

The value at risk is down to -4.01 as of today. Arcos Dorados Holdings exhibits very low volatility with skewness of -0.31 and kurtosis of -0.13. However, we advise investors to further study Arcos Dorados Holdings technical indicators to ensure that all market info is available and is reliable. Understanding different market volatility trends often help investors to time the market. Properly using volatility indicators enable traders to measure Arcos Dorados' stock risk against market volatility during both bullish and bearish trends. The higher level of volatility that comes with bear markets can directly impact Arcos Dorados' stock price while adding stress to investors as they watch their shares' value plummet. This usually forces investors to rebalance their portfolios by buying different stocks as prices fall.

Whereas some other firms under the restaurants industry are still a bit expensive, Arcos Dorados may offer a potential longer-term growth to institutional investors. To summarize, as of the 16th of November 2022, we see that Arcos Dorados follows the market closely. The company is overvalued with below average probability of distress within the next 24 months. Our final 90 days Buy-Hold-Sell recommendation on the company is Cautious Hold.

Editorial Staff

Vlad Skutelnik is a Macroaxis Contributor. Vlad covers stocks, funds, cryptocurrencies, and ETFs that are traded in North America, focusing primarily on fundamentals, valuation and market volatility. He has many years of experience in fintech, predictive investment analytics, and risk management. View Profile

This story should be regarded as informational only and should not be considered a solicitation to sell or buy any financial products. Macroaxis does not express any opinion as to the present or future value of any investments referred to in this post. This post may not be reproduced without the consent of Macroaxis LLC. Macroaxis LLC and Vlad Skutelnik do not own shares of Arcos Dorados Holdings. Please refer to our Terms of Use for any information regarding our disclosure principles.

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