Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Synthesis Electronic Technology Co.,Ltd. (SZSE:300479) does carry debt. But the more important question is: how much risk is that debt creating?
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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Synthesis Electronic TechnologyLtd's Debt?
The chart below, which you can click on for greater detail, shows that Synthesis Electronic TechnologyLtd had CN¥59.9m in debt in September 2023; about the same as the year before. But it also has CN¥248.6m in cash to offset that, meaning it has CN¥188.7m net cash.
How Healthy Is Synthesis Electronic TechnologyLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Synthesis Electronic TechnologyLtd had liabilities of CN¥189.0m due within 12 months and liabilities of CN¥30.5m due beyond that. On the other hand, it had cash of CN¥248.6m and CN¥201.3m worth of receivables due within a year. So it actually has CN¥230.4m more liquid assets than total liabilities.
This surplus suggests that Synthesis Electronic TechnologyLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Synthesis Electronic TechnologyLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Synthesis Electronic TechnologyLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Synthesis Electronic TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥338m, which is a fall of 8.8%. We would much prefer see growth.
So How Risky Is Synthesis Electronic TechnologyLtd?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Synthesis Electronic TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥30m and booked a CN¥154m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥188.7m. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example Synthesis Electronic TechnologyLtd has 2 warning signs (and 1 which can't be ignored) we think you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.