Is Scheerders van Kerchove's Verenigde fabrieken (EBR:SCHD) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Scheerders van Kerchove's Verenigde fabrieken nv (EBR:SCHD) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

The image below, which you can click on for greater detail, shows that at December 2020 Scheerders van Kerchove's Verenigde fabrieken had debt of €11.7m, up from €10.6m in one year. However, it also had €1.40m in cash, and so its net debt is €10.3m.

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

The latest balance sheet data shows that Scheerders van Kerchove's Verenigde fabrieken had liabilities of €18.1m due within a year, and liabilities of €3.97m falling due after that. Offsetting these obligations, it had cash of €1.40m as well as receivables valued at €4.67m due within 12 months. So it has liabilities totalling €16.0m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €19.2m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Scheerders van Kerchove's Verenigde fabrieken will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Scheerders van Kerchove's Verenigde fabrieken had a loss before interest and tax, and actually shrunk its revenue by 10%, to €42m. That's not what we would hope to see.

Caveat Emptor

While Scheerders van Kerchove's Verenigde fabrieken's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €4.7m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 €9.1m 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. Be aware that Scheerders van Kerchove's Verenigde fabrieken is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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