Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Syngene International Limited (NSE:SYNGENE) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
What Is Syngene International's Net Debt?
As you can see below, at the end of March 2021, Syngene International had ₹8.66b of debt, up from ₹6.88b a year ago. Click the image for more detail. However, it does have ₹12.4b in cash offsetting this, leading to net cash of ₹3.70b.
A Look At Syngene International's Liabilities
According to the last reported balance sheet, Syngene International had liabilities of ₹11.3b due within 12 months, and liabilities of ₹9.29b due beyond 12 months. On the other hand, it had cash of ₹12.4b and ₹3.39b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹4.86b.
Since publicly traded Syngene International shares are worth a total of ₹234.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.
While Syngene International doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept 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 30% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Syngene International has ₹3.70b in net cash. So we are not troubled with Syngene International's debt use. We'd be motivated to research the stock further if we found out that Syngene International insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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