Is Symphony Environmental Technologies (LON:SYM) 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Symphony Environmental Technologies plc (LON:SYM) does carry debt. But the more important question is: how much risk is that debt creating?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Symphony Environmental Technologies

What Is Symphony Environmental Technologies's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Symphony Environmental Technologies had debt of UK£2.77m, up from UK£1.21m in one year. However, because it has a cash reserve of UK£1.16m, its net debt is less, at about UK£1.61m.

A Look At Symphony Environmental Technologies' Liabilities

The latest balance sheet data shows that Symphony Environmental Technologies had liabilities of UK£4.50m due within a year, and liabilities of UK£98.0k falling due after that. Offsetting these obligations, it had cash of UK£1.16m as well as receivables valued at UK£2.18m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£1.26m.

Given Symphony Environmental Technologies has a market capitalization of UK£12.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Symphony Environmental Technologies 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, Symphony Environmental Technologies made a loss at the EBIT level, and saw its revenue drop to UK£6.8m, which is a fall of 6.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Symphony Environmental Technologies had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping UK£2.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through UK£1.5m of cash over the last year. So in short it's a really risky stock. 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. We've identified 4 warning signs with Symphony Environmental Technologies (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.

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.