Debt relative to earnings among companies in the Russell 2000 Restaurants Index is now near the highest on record, according to Bloomberg. And this trend looks as though it is only going to get worse as a result of new accounting rules that require more leases to now be recorded on company balance sheets.
In addition to these accounting rule changes, growth in the industry is slowing as labor costs rise.
Rob Hunziker, whose company Advanced Restaurant Sales provides brokerage services to the industry, said: "The debt has been so cheap the last four or five years. Now cash flows are starting to decline, and that debt is getting scary looking. There's a problem, and it's getting worse."