Would Scheerders van Kerchove's Verenigde fabrieken (EBR:SCHD) Be Better Off With Less Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Scheerders van Kerchove's Verenigde fabrieken nv (EBR:SCHD) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. 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

What Is Scheerders van Kerchove's Verenigde fabrieken's Debt?

As you can see below, Scheerders van Kerchove's Verenigde fabrieken had €11.9m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has €2.39m in cash leading to net debt of about €9.52m.

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

We can see from the most recent balance sheet that Scheerders van Kerchove's Verenigde fabrieken had liabilities of €17.2m falling due within a year, and liabilities of €5.28m due beyond that. Offsetting this, it had €2.39m in cash and €6.54m in receivables that were due within 12 months. So it has liabilities totalling €13.5m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Scheerders van Kerchove's Verenigde fabrieken has a market capitalization of €27.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 5.0%, to €42m. That's not what we would hope to see.

Caveat Emptor

Importantly, Scheerders van Kerchove's Verenigde fabrieken had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable €3.5m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of €7.8m. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Scheerders van Kerchove's Verenigde fabrieken has 3 warning signs (and 2 which make us uncomfortable) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

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