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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Seamless Distribution Systems AB (publ) (STO:SDS) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 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, because it has a cash reserve of kr11.1m, its net debt is less, at about kr8.01m.

How Healthy Is Seamless Distribution Systems' Balance Sheet?

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.

When you consider that this deficiency exceeds the company's kr121.9m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Seamless Distribution Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Seamless Distribution Systems had a loss before interest and tax, and actually shrunk its revenue by 15%, to kr244m. 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. 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 had negative free cash flow of kr36m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Seamless Distribution Systems (2 are a bit unpleasant) you should be aware of.

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.