Should I buy this falling FTSE penny stock?

This FTSE stock has fallen into the penny stock category. Could it be a shrewd addition to this Fool’s portfolio for long-term recovery?

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Many FTSE stocks have dropped in recently due to macroeconomic issues. One that now trades as a penny stock is The Restaurant Group (LSE:RTN). Could there be a longer-term recovery on the cards for the stock, and if so, should I buy the shares? Let’s take a closer look.

Restauranteur

As a quick reminder, Restaurant Group operates close to 400 restaurants and pub/restaurants throughout the UK. Some of its best known names include Wagamama and Frankie & Bennys. It also has a concessions business that are mostly located at UK airports.

So what’s happening with the Restaurant Group share price currently? Well, as I write, the shares are trading for 42p. At this time last year, the stock was trading for 115p, which is a 63% decrease over a 12-month period.

I’m not surprised that Restaurant Group shares have fallen so sharply. The Covid-19 pandemic affected the business badly as locations were closed. Furthermore, recent macroeconomic headwinds have continued to slow any recovery.

To buy or not to buy

So what are the pros and cons of me buying Restaurant Group shares?

FOR: A couple of recent updates by Restaurant Group have been positive, in my opinion. Firstly, a trading update for the 19 weeks to 15 May showed that one of its best brands, Wagamama, had returned to pre-pandemic levels of trading. Net debt actually fell too, by £6m, which is a positive sign. I believe if similar levels of trading can continue, the share price could increase steadily.

AGAINST: When the pandemic struck, many FTSE stocks had to borrow to keep the lights on. Restaurant Group was one of these businesses. As an investor, debt makes me feel uneasy, especially for a firm operating in an industry facing other challenges such as inflation and the current cost-of-living crisis here in the UK. It has managed to decrease debt as mentioned above but it is still something that puts me off.

FOR: Restaurant Group said in its last update it had £220m worth of cash. This is a great buffer to have in case of any potential further Covid-19-related disruption, which is still potentially a threat. It could also be used for growth, the business has said. This is exactly what it has used that cash for. Yesterday, Restaurant Group confirmed it purchased Mexican restaurant business Barburrito for £7m and added it to its umbrella of brands. This acquisition could prove to be a shrewd one to boost performance and returns in the longer term.

AGAINST: Finally, macroeconomic issues will have a material impact on profitability as well as sales. The rising cost of materials will impact profit margins, which would then affect returns. Furthermore, the current cost-of-living crisis in the UK could mean less people are able to regularly frequent their favourite eateries. This could also affect performance and returns for Restaurant Group too.

A FTSE stock I would avoid

Reviewing the pros and cons, I’ve come to the decision that I wouldn’t add Restaurant Group shares to my holdings. For me, the negatives outweigh the positives.

I will keep a keen eye on developments and perhaps revisit adding Restaurant Group shares to my holdings at a later time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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