You can look at a stock’s earnings and revenue numbers and get a pretty good picture of what’s going on.
But it’s important to consider other fundamentals when evaluating an investment, according Real Money Columnist Stephen “Sarge” Guilfoyle.
Take Darden Restaurants (DRI) – Get Darden Restaurants, Inc. Report for example.
“I almost want to like this name,” Guilfoyle wrote in a recent Real Money column. “Readers will see that DRI has been in a downward sloping trend since peaking last September,”
While the latest growth in quarterly sales was stellar, up 38.1%, the company added 33 new locations during the period. Same-restaurant sales rose by 29.9% at Olive Garden, 31.6% at LongHorn Steakhouse, 85.8% for the Fine Dining segment, and by 55.2% for all other businesses.
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The company reported GAAP EPS of $1.93 on revenue of $2.45 billion for the fiscal third quarter. Even though sales shot up by 41.6% year-over-year, the company’s performance still did not meet Wall Street estimates.
But, and this is the problem for Guilfoyle, Darden’s balance sheet is weak because the company repurchased $382 million worth of outstanding common stock over the three months. Operating costs and expenses rose by 35.5% to $2.15 billion, leaving the company with net income of $247 million.
The company’s current assets fell to $1.28 billion, its third consecutive month of declines while current liabilities rose to $1.82 billion, resulting in a current ratio at an ugly 0.7, down from 0.85 three months ago.
“The implication would be that at some point in the near to medium term, Darden could have a difficult time meeting the firm’s obligations,” he wrote. “I’ve got to tell you that I was really starting to like this name until I got to the balance sheet. This balance sheet does not pass my test and that will impact my decision.”
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