Is Scandinavian Brake Systems (CPH:SBS) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Scandinavian Brake Systems A/S (CPH:SBS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Scandinavian Brake Systems

What Is Scandinavian Brake Systems's Debt?

As you can see below, Scandinavian Brake Systems had kr.163.8m of debt at December 2021, down from kr.432.3m a year prior. Net debt is about the same, since the it doesn't have much cash.

A Look At Scandinavian Brake Systems' Liabilities

The latest balance sheet data shows that Scandinavian Brake Systems had liabilities of kr.10.0m due within a year, and liabilities of kr.168.4m falling due after that. On the other hand, it had cash of kr.100.0k and kr.12.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr.165.5m.

The deficiency here weighs heavily on the kr.27.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Scandinavian Brake Systems would probably need a major re-capitalization if its creditors were to demand repayment. 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 Scandinavian Brake Systems will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Scandinavian Brake Systems had a loss before interest and tax, and actually shrunk its revenue by 98%, to kr.7.9m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Scandinavian Brake Systems's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping kr.20m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost kr.19m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. 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. Case in point: We've spotted 5 warning signs for Scandinavian Brake Systems you should be aware of, and 2 of them shouldn't be ignored.

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.