Health Check: How Prudently Does Scheerders van Kerchove's Verenigde fabrieken (EBR:SCHD) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Scheerders van Kerchove's Verenigde fabrieken nv (EBR:SCHD) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Scheerders van Kerchove's Verenigde fabrieken

How Much Debt Does Scheerders van Kerchove's Verenigde fabrieken Carry?

As you can see below, at the end of December 2022, Scheerders van Kerchove's Verenigde fabrieken had €12.2m of debt, up from €10.5m a year ago. Click the image for more detail. However, because it has a cash reserve of €1.31m, its net debt is less, at about €10.9m.

A Look At Scheerders van Kerchove's Verenigde fabrieken's Liabilities

We can see from the most recent balance sheet that Scheerders van Kerchove's Verenigde fabrieken had liabilities of €19.3m falling due within a year, and liabilities of €4.93m due beyond that. Offsetting this, it had €1.31m in cash and €4.42m in receivables that were due within 12 months. So it has liabilities totalling €18.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €22.0m, so it does suggest shareholders should keep an eye on Scheerders van Kerchove's Verenigde fabrieken's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is Scheerders van Kerchove's Verenigde fabrieken's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Scheerders van Kerchove's Verenigde fabrieken saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Over the last twelve months Scheerders van Kerchove's Verenigde fabrieken produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €2.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of €3.6m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Scheerders van Kerchove's Verenigde fabrieken (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.