Is Synlait Milk (NZSE:SML) Using Debt Sensibly?

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, Synlait Milk Limited (NZSE:SML) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Synlait Milk's Net Debt?

As you can see below, Synlait Milk had NZ$328.8m of debt at July 2025, down from NZ$561.0m a year prior. However, it does have NZ$78.3m in cash offsetting this, leading to net debt of about NZ$250.6m.

A Look At Synlait Milk's Liabilities

According to the last reported balance sheet, Synlait Milk had liabilities of NZ$721.8m due within 12 months, and liabilities of NZ$53.3m due beyond 12 months. Offsetting this, it had NZ$78.3m in cash and NZ$102.8m in receivables that were due within 12 months. So its liabilities total NZ$594.0m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of NZ$503.7m, we think shareholders really should watch Synlait Milk's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Synlait Milk 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.

Check out our latest analysis for Synlait Milk

Over 12 months, Synlait Milk reported revenue of NZ$1.8b, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Synlait Milk had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NZ$20m. Considering that alongside the liabilities mentioned above make us nervous 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$40m. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Synlait Milk , and understanding them should be part of your investment process.

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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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.