Scheerders van Kerchove's Verenigde fabrieken (EBR:SCHD) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Scheerders van Kerchove's Verenigde fabrieken nv (EBR:SCHD) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at 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?

You can click the graphic below for the historical numbers, but it shows that Scheerders van Kerchove's Verenigde fabrieken had €10.5m of debt in December 2021, down from €11.7m, one year before. However, it also had €1.25m in cash, and so its net debt is €9.29m.

How Healthy Is Scheerders van Kerchove's Verenigde fabrieken's Balance Sheet?

The latest balance sheet data shows that Scheerders van Kerchove's Verenigde fabrieken had liabilities of €17.7m due within a year, and liabilities of €3.82m falling due after that. Offsetting this, it had €1.25m in cash and €5.22m in receivables that were due within 12 months. So its liabilities total €15.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of €20.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Scheerders van Kerchove's Verenigde fabrieken shareholders face the double whammy of a high net debt to EBITDA ratio (5.1), and fairly weak interest coverage, since EBIT is just 1.0 times the interest expense. The debt burden here is substantial. However, the silver lining was that Scheerders van Kerchove's Verenigde fabrieken achieved a positive EBIT of €530k in the last twelve months, an improvement on the prior year's loss. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Scheerders van Kerchove's Verenigde fabrieken recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

On the face of it, Scheerders van Kerchove's Verenigde fabrieken's net debt to EBITDA left us tentative about the stock, and its interest cover was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to grow its EBIT isn't such a worry. We're quite clear that we consider Scheerders van Kerchove's Verenigde fabrieken to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Scheerders van Kerchove's Verenigde fabrieken has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.