Does Synlait Milk (NZSE:SML) 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.' 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. We can see that Synlait Milk Limited (NZSE:SML) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Synlait Milk's Net Debt?

As you can see below, Synlait Milk had NZ$440.9m of debt at January 2025, down from NZ$589.8m a year prior. However, because it has a cash reserve of NZ$49.0m, its net debt is less, at about NZ$391.9m.

How Strong Is Synlait Milk's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Synlait Milk had liabilities of NZ$693.1m due within 12 months and liabilities of NZ$184.0m due beyond that. On the other hand, it had cash of NZ$49.0m and NZ$184.5m worth of receivables due within a year. So its liabilities total NZ$643.5m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the NZ$355.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Synlait Milk would likely require a major re-capitalisation if it had to pay its creditors today. 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 Synlait Milk'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.

Check out our latest analysis for Synlait Milk

Over 12 months, Synlait Milk saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Synlait Milk had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NZ$32m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of NZ$81m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Synlait Milk you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.