Health Check: How Prudently Does Synex Renewable Energy (TSE:SXI) Use Debt?

Warren Buffett famously said, '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. As with many other companies Synex Renewable Energy Corporation (TSE:SXI) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Synex Renewable Energy

What Is Synex Renewable Energy's Net Debt?

As you can see below, Synex Renewable Energy had CA$13.6m of debt at December 2023, down from CA$14.3m a year prior. On the flip side, it has CA$384.6k in cash leading to net debt of about CA$13.2m.

A Look At Synex Renewable Energy's Liabilities

According to the last reported balance sheet, Synex Renewable Energy had liabilities of CA$1.60m due within 12 months, and liabilities of CA$14.0m due beyond 12 months. Offsetting these obligations, it had cash of CA$384.6k as well as receivables valued at CA$564.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.7m.

The deficiency here weighs heavily on the CA$9.16m 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. At the end of the day, Synex Renewable Energy would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Synex Renewable Energy will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Synex Renewable Energy reported revenue of CA$2.7m, which is a gain of 7.6%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Synex Renewable Energy produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$549k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident 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 CA$424k over the last twelve months. That means it's on the risky side of things. 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. Case in point: We've spotted 5 warning signs for Synex Renewable Energy you should be aware of, and 3 of them are potentially serious.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.