Is Societatea Comerciala Sometra (BVB:SOMR) Using Debt In A Risky Way?

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.' 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. Importantly, Societatea Comerciala Sometra SA (BVB:SOMR) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, 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.

Check out our latest analysis for Societatea Comerciala Sometra

How Much Debt Does Societatea Comerciala Sometra Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Societatea Comerciala Sometra had debt of RON48.0m, up from RON40.8m in one year. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Societatea Comerciala Sometra's Balance Sheet?

We can see from the most recent balance sheet that Societatea Comerciala Sometra had liabilities of RON60.8m falling due within a year, and liabilities of RON235.7k due beyond that. Offsetting this, it had RON894.7k in cash and RON8.71m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON51.5m.

The deficiency here weighs heavily on the RON20.9m 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 definitely think shareholders need to watch this one closely. After all, Societatea Comerciala Sometra would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Societatea Comerciala Sometra 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Societatea Comerciala Sometra finds some valuable resources, before it runs out of money.

Caveat Emptor

Over the last twelve months Societatea Comerciala Sometra produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable RON7.2m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of RON2.4m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Societatea Comerciala Sometra that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.