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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Synex Renewable Energy Corporation (TSE:SXI) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Synex Renewable Energy

How Much Debt Does Synex Renewable Energy Carry?

The image below, which you can click on for greater detail, shows that Synex Renewable Energy had debt of CA$13.7m at the end of June 2023, a reduction from CA$14.6m over a year. However, it does have CA$318.7k in cash offsetting this, leading to net debt of about CA$13.4m.

How Healthy Is Synex Renewable Energy's Balance Sheet?

According to the last reported balance sheet, Synex Renewable Energy had liabilities of CA$1.52m due within 12 months, and liabilities of CA$14.3m due beyond 12 months. Offsetting these obligations, it had cash of CA$318.7k as well as receivables valued at CA$132.0k due within 12 months. So it has liabilities totalling CA$15.4m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CA$8.12m 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Synex Renewable Energy had a loss before interest and tax, and actually shrunk its revenue by 34%, to CA$2.2m. 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. Indeed, it lost a very considerable CA$1.2m at the EBIT level. 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 burned through CA$647k in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that Synex Renewable Energy is showing 5 warning signs in our investment analysis , and 3 of those are significant...

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.