Health Check: How Prudently Does Seamless Distribution Systems (NGM:SDS) Use Debt?

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.' 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 can see that Seamless Distribution Systems AB (publ) (NGM:SDS) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 4 warning signs about Seamless Distribution Systems. View them for free.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Seamless Distribution Systems Carry?

As you can see below, at the end of March 2025, Seamless Distribution Systems had kr232.8m of debt, up from kr212.9m a year ago. Click the image for more detail. On the flip side, it has kr12.5m in cash leading to net debt of about kr220.3m.

How Strong Is Seamless Distribution Systems' Balance Sheet?

The latest balance sheet data shows that Seamless Distribution Systems had liabilities of kr111.3m due within a year, and liabilities of kr232.8m falling due after that. Offsetting these obligations, it had cash of kr12.5m as well as receivables valued at kr132.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr199.0m.

Given this deficit is actually higher than the company's market capitalization of kr139.0m, we think shareholders really should watch Seamless Distribution Systems's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Seamless Distribution Systems 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.

Check out our latest analysis for Seamless Distribution Systems

Over 12 months, Seamless Distribution Systems made a loss at the EBIT level, and saw its revenue drop to kr224m, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

While Seamless Distribution Systems's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping kr19m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of kr15m. And until that time we think this is a risky stock. 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. To that end, you should learn about the 4 warning signs we've spotted with Seamless Distribution Systems (including 2 which are potentially serious) .

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.