Is Synthesis Electronic TechnologyLtd (SZSE:300479) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Synthesis Electronic Technology Co.,Ltd. (SZSE:300479) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Synthesis Electronic TechnologyLtd

What Is Synthesis Electronic TechnologyLtd's Debt?

As you can see below, at the end of September 2024, Synthesis Electronic TechnologyLtd had CN¥72.9m of debt, up from CN¥59.9m a year ago. Click the image for more detail. However, it does have CN¥261.1m in cash offsetting this, leading to net cash of CN¥188.1m.

How Healthy Is Synthesis Electronic TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that Synthesis Electronic TechnologyLtd had liabilities of CN¥865.6m falling due within a year, and liabilities of CN¥25.1m due beyond that. Offsetting these obligations, it had cash of CN¥261.1m as well as receivables valued at CN¥308.5m due within 12 months. So it has liabilities totalling CN¥321.2m more than its cash and near-term receivables, combined.

Of course, Synthesis Electronic TechnologyLtd has a market capitalization of CN¥4.91b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Synthesis Electronic TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Synthesis Electronic TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Synthesis Electronic TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥301m. That's not what we would hope to see.

So How Risky Is Synthesis Electronic TechnologyLtd?

While Synthesis Electronic TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥4.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 2 warning signs for Synthesis Electronic TechnologyLtd you should be aware of, and 1 of them doesn't sit too well with us.

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.