Is Seamless Distribution Systems (NGM:SDS) Using Debt Sensibly?

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, Seamless Distribution Systems AB (publ) (NGM:SDS) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Seamless Distribution Systems

What Is Seamless Distribution Systems's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Seamless Distribution Systems had debt of kr235.5m, up from kr207.6m in one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Seamless Distribution Systems' Liabilities

Zooming in on the latest balance sheet data, we can see that Seamless Distribution Systems had liabilities of kr93.1m due within 12 months and liabilities of kr212.1m due beyond that. Offsetting these obligations, it had cash of kr3.70m as well as receivables valued at kr119.5m due within 12 months. So its liabilities total kr182.1m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the kr93.6m 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. After all, Seamless Distribution Systems would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Seamless Distribution Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Seamless Distribution Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 7.9%, to kr265m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Seamless Distribution Systems produced an earnings before interest and tax (EBIT) loss. Indeed, it lost kr9.1m at the EBIT level. 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. Not least because it burned through kr33m in negative free cash flow over the last year. 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. Case in point: We've spotted 4 warning signs for Seamless Distribution Systems you should be aware of, and 3 of them are concerning.

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.