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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Synertone Communication Corporation (HKG:1613) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Synertone Communication
What Is Synertone Communication's Net Debt?
The image below, which you can click on for greater detail, shows that Synertone Communication had debt of HK$61.7m at the end of September 2020, a reduction from HK$95.8m over a year. However, it does have HK$31.0m in cash offsetting this, leading to net debt of about HK$30.7m.
A Look At Synertone Communication's Liabilities
According to the last reported balance sheet, Synertone Communication had liabilities of HK$119.5m due within 12 months, and liabilities of HK$4.97m due beyond 12 months. Offsetting this, it had HK$31.0m in cash and HK$60.1m in receivables that were due within 12 months. So its liabilities total HK$33.4m more than the combination of its cash and short-term receivables.
Of course, Synertone Communication has a market capitalization of HK$237.4m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Synertone Communication'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, Synertone Communication made a loss at the EBIT level, and saw its revenue drop to HK$67m, which is a fall of 13%. That's not what we would hope to see.
Caveat Emptor
While Synertone Communication'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 HK$21m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through HK$20m 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Synertone Communication is showing 3 warning signs in our investment analysis , you should know about...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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About SEHK:1613
Synertone Communication
Designs, researches, develops, produces, and sells automation control and intelligent building systems in the People’s Republic of China, Hong Kong, and internationally.
Flawless balance sheet low.