Does Serneke Group (STO:SRNKE B) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Serneke Group AB (publ) (STO:SRNKE B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Serneke Group

How Much Debt Does Serneke Group Carry?

As you can see below, Serneke Group had kr1.53b of debt at September 2020, down from kr1.73b a year prior. However, because it has a cash reserve of kr81.0m, its net debt is less, at about kr1.45b.

How Strong Is Serneke Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Serneke Group had liabilities of kr2.58b due within 12 months and liabilities of kr1.25b due beyond that. Offsetting this, it had kr81.0m in cash and kr1.56b in receivables that were due within 12 months. So it has liabilities totalling kr2.19b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's kr1.65b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Serneke Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Serneke Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.6%, to kr7.0b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Serneke Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping kr476m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of kr525m over the last twelve months. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Serneke Group is showing 2 warning signs in our investment analysis , and 1 of those is significant...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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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