Does Synektik Spólka Akcyjna (WSE:SNT) 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.' 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, Synektik Spólka Akcyjna (WSE:SNT) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Synektik Spólka Akcyjna

What Is Synektik Spólka Akcyjna's Debt?

The image below, which you can click on for greater detail, shows that Synektik Spólka Akcyjna had debt of zł10.0m at the end of December 2020, a reduction from zł11.6m over a year. But on the other hand it also has zł22.5m in cash, leading to a zł12.5m net cash position.

A Look At Synektik Spólka Akcyjna's Liabilities

Zooming in on the latest balance sheet data, we can see that Synektik Spólka Akcyjna had liabilities of zł34.4m due within 12 months and liabilities of zł28.4m due beyond that. Offsetting these obligations, it had cash of zł22.5m as well as receivables valued at zł20.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł20.2m.

Given Synektik Spólka Akcyjna has a market capitalization of zł242.2m, 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. While it does have liabilities worth noting, Synektik Spólka Akcyjna also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Synektik Spólka Akcyjna grew its EBIT by 125% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Synektik Spólka Akcyjna will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Synektik Spólka Akcyjna has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Synektik Spólka Akcyjna recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Synektik Spólka Akcyjna has zł12.5m in net cash. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in zł11m. So we don't think Synektik Spólka Akcyjna's use of debt is 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 Synektik Spólka Akcyjna 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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