Does Scandinavian Brake Systems (CPH:SBS) use debt sensibly?


Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Scandinavian A/S brake systems (CPH:SBS) has debt on its balance sheet. But does this debt worry shareholders?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, many companies use debt to finance their 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 Scandinavian brake systems

How much debt does Scandinavian Brake Systems have?

As you can see below, Scandinavian Brake Systems had a debt of 163.8 million kr in December 2021, compared to 432.3 million kr the previous year. Net debt is about the same, since she doesn’t have a lot of cash.

CPSE: SBS Debt to Equity History April 9, 2022

A look at the responsibilities of Scandinavian Brake Systems

The latest balance sheet data shows that Scandinavian Brake Systems had liabilities of 10.0 million kr maturing within one year, and liabilities of 168.4 million kr maturing thereafter. On the other hand, he had a cash position of 100,000 kr and 12.8 million kr of receivables due within the year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 165.5 million kr.

The deficiency here weighs heavily on the 27.7 million kr business itself, like a child struggling under the weight of a huge backpack full of books, his sports gear and a trumpet . We would therefore be watching his balance sheet closely, no doubt. Ultimately, Scandinavian Brake Systems would likely need a major recapitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when analyzing debt. But you can’t look at debt in total isolation; since Scandinavian Brake Systems will need revenue to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

Last year, Scandinavian Brake Systems recorded a loss before interest and taxes and actually reduced its revenue by 98% to 7.9 million kr. To be honest, that doesn’t bode well.

Caveat Emptor

Not only have Scandinavian Brake Systems’ revenues fallen over the past twelve months, they have also produced negative earnings before interest and taxes (EBIT). Its EBIT loss was a whopping kr.20m. Combining this information with the significant liabilities we have already discussed makes us very hesitant about this stock, to say the least. Of course, he may be able to improve his situation with a bit of luck and good execution. Still, we wouldn’t bet on it given that he lost 19 million kr in the last twelve months and he doesn’t have much cash. So while it’s not wise to assume the business will fail, we think it’s risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Example: we have identified 5 warning signs for Scandinavian brake systems you should be aware of, and 2 of them should not be ignored.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.


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