Arcos Dorados Holding Inc (ARCO), McDonald’s Corporation (MCD): Debt Is a Universal Language

Between Starbucks Corporation (NASDAQ:SBUX) and Arcos Dorados Holding Inc (NYSE:ARCO), Starbucks carries a growth rate of 19.58%, but pays the lowest yield at just 1.22%. The stock isn’t cheap either with a forward P/E ratio of over 31, which gives it a PEG+Y of 0.66. By comparison, Arcos Dorados is expected to grow by 27.1% and pays a yield of 2.05%. This gives investors an expected total return of 29.15%. Given that the company’s 2013 projected P/E ratio is 30.61, the stock’s PEG+Y is 0.95. Based on these numbers, clearly Arcos Dorados is a better value.

All the Potential in the World
Though everything looks great when it comes to Arcos Dorados Holding Inc (NYSE:ARCO)’ growth, the company is spending itself into trouble. One thing all investors need to understand is the company’s financials. When it comes to expanding restaurant concepts, one issue that can derail their growth is too much debt. Though everything else looks good with Arcos Dorados’ stock, investors need to be careful of the company’s balance sheet.

One way to tell if a company might be carrying too much debt is by looking at their interest expense versus their operating income. The company with the least exposure in this way is Starbucks Corporation (NASDAQ:SBUX). Starbucks only spends about 1% of their operating income on interest, versus YUM Brands (NYSE:YUM) spends 6.37% and McDonald’s Corporation (NYSE:MCD) spends 6.57%. By comparison, Arcos Dorados Holding Inc (NYSE:ARCO) spends 40.21% of their operating income on interest. When a company spends $0.40 of every $1 of operating income you know they won’t have a lot left over once you subtract capital expenditures too.

While the Arcos Dorados Holding Inc (NYSE:ARCO) story sounds promising, the company’s relatively expensive debt load has me on the sidelines. If the McDonald’s Corporation (NYSE:MCD) of Latin America wants to prosper, they need to address this issue and quickly. If the company continues with this type of debt burden, all the potential in the world won’t mean a thing.

Chad Henage owns shares of McDonald’s. The Motley Fool recommends McDonald’s and Starbucks. The Motley Fool owns shares of Arcos Dorados, McDonald’s, and Starbucks.

The article Debt Is a Universal Language originally appeared on Fool.com.

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