Does Synergis Holdings (HKG:2340) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Synergis Holdings Limited (HKG:2340) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Synergis Holdings

How Much Debt Does Synergis Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Synergis Holdings had HK$15.0m of debt in June 2021, down from HK$148.3m, one year before. But on the other hand it also has HK$122.6m in cash, leading to a HK$107.6m net cash position.

How Strong Is Synergis Holdings' Balance Sheet?

We can see from the most recent balance sheet that Synergis Holdings had liabilities of HK$312.7m falling due within a year, and liabilities of HK$6.61m due beyond that. On the other hand, it had cash of HK$122.6m and HK$326.2m worth of receivables due within a year. So it actually has HK$129.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Synergis Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Synergis Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Synergis Holdings'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, Synergis Holdings made a loss at the EBIT level, and saw its revenue drop to HK$1.2b, which is a fall of 14%. That's not what we would hope to see.

So How Risky Is Synergis Holdings?

While Synergis Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$32m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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 3 warning signs with Synergis Holdings , 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.