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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Seamless Distribution Systems AB (publ) (NGM:SDS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Seamless Distribution Systems

What Is Seamless Distribution Systems's Net Debt?

The image below, which you can click on for greater detail, shows that Seamless Distribution Systems had debt of kr19.1m at the end of September 2023, a reduction from kr201.2m over a year. However, it also had kr11.1m in cash, and so its net debt is kr8.01m.

A Look At Seamless Distribution Systems' Liabilities

We can see from the most recent balance sheet that Seamless Distribution Systems had liabilities of kr104.2m falling due within a year, and liabilities of kr205.2m due beyond that. Offsetting these obligations, it had cash of kr11.1m as well as receivables valued at kr116.5m due within 12 months. So its liabilities total kr181.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the kr109.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Seamless Distribution Systems made a loss at the EBIT level, and saw its revenue drop to kr244m, which is a fall of 15%. That's not what we would hope to see.

Caveat Emptor

Not only did Seamless Distribution Systems's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable kr35m 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 burned through kr36m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. For instance, we've identified 4 warning signs for Seamless Distribution Systems (1 shouldn't be ignored) you should be aware of.

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.