These 4 Measures Indicate That Syngene International (NSE:SYNGENE) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Syngene International Limited (NSE:SYNGENE) does carry debt. But should shareholders be worried about its use of debt?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Syngene International

What Is Syngene International's Debt?

As you can see below, Syngene International had ₹5.75b of debt at March 2023, down from ₹7.90b a year prior. However, it does have ₹13.6b in cash offsetting this, leading to net cash of ₹7.81b.

A Look At Syngene International's Liabilities

According to the last reported balance sheet, Syngene International had liabilities of ₹11.9b due within 12 months, and liabilities of ₹10.2b due beyond 12 months. On the other hand, it had cash of ₹13.6b and ₹5.29b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹3.28b.

Having regard to Syngene International's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹258.1b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Syngene International boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Syngene International has boosted its EBIT by 57%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Syngene International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 44% of its EBIT, which is weaker 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 ₹7.81b in net cash. And we liked the look of last year's 57% year-on-year EBIT growth. So is Syngene International's debt a risk? It doesn't seem so to us. 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. Be aware that Syngene International is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.