Does Syngene International (NSE:SYNGENE) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Syngene International Limited (NSE:SYNGENE) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Syngene International

What Is Syngene International's Debt?

As you can see below, Syngene International had ₹8.84b of debt at September 2021, down from ₹12.4b a year prior. But on the other hand it also has ₹10.7b in cash, leading to a ₹1.89b net cash position.

How Healthy Is Syngene International's Balance Sheet?

We can see from the most recent balance sheet that Syngene International had liabilities of ₹9.42b falling due within a year, and liabilities of ₹9.08b due beyond that. Offsetting this, it had ₹10.7b in cash and ₹3.57b in receivables that were due within 12 months. So it has liabilities totalling ₹4.20b more than its cash and near-term receivables, combined.

This state of affairs indicates that Syngene International's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₹231.8b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Syngene International also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Syngene International grew its EBIT by 9.3% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Syngene International's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Syngene International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Syngene International's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Syngene International has ₹1.89b in net cash. On top of that, it increased its EBIT by 9.3% in the last twelve months. So we don't have any problem with Syngene International's use of debt. 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. For instance, we've identified 1 warning sign for Syngene International that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.