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Big Issue is Troublesome For This Restaurant Chain's Stock

It's profitable and revenues are rising, but Real Money Columnist Stephen 'Sarge' Guilfoyle found something else that concerns him.
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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 Free 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.

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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