Syngene International (NSE:SYNGENE) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Syngene International Limited (NSE:SYNGENE) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that SYNGENE is potentially overvalued!

What Is Syngene International's Net Debt?

The chart below, which you can click on for greater detail, shows that Syngene International had ₹7.70b in debt in September 2022; about the same as the year before. However, its balance sheet shows it holds ₹11.0b in cash, so it actually has ₹3.35b net cash.

A Look At Syngene International's Liabilities

We can see from the most recent balance sheet that Syngene International had liabilities of ₹10.4b falling due within a year, and liabilities of ₹10.7b due beyond that. On the other hand, it had cash of ₹11.0b and ₹4.91b worth of receivables due within a year. So its liabilities total ₹5.12b more than the combination of its cash and short-term receivables.

Of course, Syngene International has a market capitalization of ₹234.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Syngene International boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Syngene International grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Syngene International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Looking at the most recent three years, Syngene International recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Syngene International's liabilities, but we can be reassured by the fact it has has net cash of ₹3.35b. And we liked the look of last year's 23% year-on-year EBIT growth. So we don't think Syngene International's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Syngene International has 1 warning sign we think 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.