Here's Why Synopex (KOSDAQ:025320) Can Afford Some 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.' 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 Synopex Inc. (KOSDAQ:025320) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Synopex

How Much Debt Does Synopex Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Synopex had ₩50.6b of debt, an increase on ₩45.8b, over one year. However, it does have ₩31.8b in cash offsetting this, leading to net debt of about ₩18.8b.

How Strong Is Synopex's Balance Sheet?

We can see from the most recent balance sheet that Synopex had liabilities of ₩86.7b falling due within a year, and liabilities of ₩9.24b due beyond that. Offsetting this, it had ₩31.8b in cash and ₩28.2b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩36.0b.

Given Synopex has a market capitalization of ₩304.6b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Synopex'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, Synopex reported revenue of ₩220b, which is a gain of 5.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Synopex produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩3.1b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩2.6b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Synopex's profit, revenue, and operating cashflow have changed over the last few years.

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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