Synertone Communication (HKG:1613) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Synertone Communication Corporation (HKG:1613) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Synertone Communication

What Is Synertone Communication's Debt?

You can click the graphic below for the historical numbers, but it shows that Synertone Communication had HK$56.5m of debt in September 2023, down from HK$60.9m, one year before. However, because it has a cash reserve of HK$12.8m, its net debt is less, at about HK$43.7m.

A Look At Synertone Communication's Liabilities

The latest balance sheet data shows that Synertone Communication had liabilities of HK$120.4m due within a year, and liabilities of HK$215.0k falling due after that. Offsetting these obligations, it had cash of HK$12.8m as well as receivables valued at HK$49.4m due within 12 months. So its liabilities total HK$58.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of HK$88.6m, so it does suggest shareholders should keep an eye on Synertone Communication's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Synertone Communication'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.

Over 12 months, Synertone Communication made a loss at the EBIT level, and saw its revenue drop to HK$58m, which is a fall of 38%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Synertone Communication's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$40m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled HK$2.9m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 3 warning signs for Synertone Communication you should be aware of, and 1 of them shouldn't be ignored.

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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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.