Is Synex Renewable Energy (TSE:SXI) Using Debt Sensibly?

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. 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?

Why Does Debt Bring Risk?

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. In the worst case scenario, 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 capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View 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$14.3m of debt at March 2023, down from CA$15.2m a year prior. However, because it has a cash reserve of CA$552.2k, its net debt is less, at about CA$13.8m.

How Healthy Is Synex Renewable Energy's Balance Sheet?

The latest balance sheet data shows that Synex Renewable Energy had liabilities of CA$1.98m due within a year, and liabilities of CA$14.6m falling due after that. On the other hand, it had cash of CA$552.2k and CA$180.9k worth of receivables due within a year. So its liabilities total CA$15.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CA$8.77m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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 it is Synex Renewable Energy's earnings that will influence how the balance sheet holds up in the future. 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 made a loss at the EBIT level, and saw its revenue drop to CA$2.5m, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

While Synex Renewable Energy's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$1.2m. 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 had negative free cash flow of CA$503k over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Synex Renewable Energy you should be aware of, and 2 of them shouldn't be ignored.

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.