Does Seamless Distribution Systems (STO:SDS) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Seamless Distribution Systems AB (publ) (STO:SDS) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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 March 2023 Seamless Distribution Systems had debt of kr211.2m, up from kr196.0m in one year. However, it also had kr11.2m in cash, and so its net debt is kr200.1m.

How Strong Is Seamless Distribution Systems' Balance Sheet?

The latest balance sheet data shows that Seamless Distribution Systems had liabilities of kr121.8m due within a year, and liabilities of kr202.1m falling due after that. On the other hand, it had cash of kr11.2m and kr101.1m worth of receivables due within a year. So it has liabilities totalling kr211.6m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the kr105.9m 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'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. 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 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 kr248m, which is a fall of 14%. We would much prefer see growth.

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). Its EBIT loss was a whopping kr43m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 a bit concerning) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.