What a brutal six months it’s been for Kura Sushi. The stock has dropped 27.7% and now trades at $47.75, rattling many shareholders. This might have investors contemplating their next move.

Is there a buying opportunity in Kura Sushi, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Is Kura Sushi Not Exciting?

Even with the cheaper entry price, we're cautious about Kura Sushi. Here are three reasons you should be careful with KRUS and a stock we'd rather own.

1. Flat Same-Store Sales Indicate Weak Demand

Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Kura Sushi’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.

2. Cash Burn Ignites Concerns

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

While Kura Sushi’s free cash flow broke even this quarter, the broader story hasn’t been so clean. Over the last two years, Kura Sushi’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 9.6%, meaning it lit $9.62 of cash on fire for every $100 in revenue.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Kura Sushi’s $170 million of debt exceeds the $62.46 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $19.07 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Kura Sushi could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Kura Sushi can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Kura Sushi isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 25× forward EV-to-EBITDA (or $47.75 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward one of our top software and edge computing picks.

Stocks We Would Buy Instead of Kura Sushi

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