Is Synektik Spólka Akcyjna (WSE:SNT) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Synektik Spólka Akcyjna (WSE:SNT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Synektik Spólka Akcyjna

How Much Debt Does Synektik Spólka Akcyjna Carry?

As you can see below, Synektik Spólka Akcyjna had zł10.6m of debt at June 2020, down from zł12.1m a year prior. However, because it has a cash reserve of zł7.53m, its net debt is less, at about zł3.07m.

How Healthy Is Synektik Spólka Akcyjna's Balance Sheet?

The latest balance sheet data shows that Synektik Spólka Akcyjna had liabilities of zł24.3m due within a year, and liabilities of zł23.3m falling due after that. Offsetting this, it had zł7.53m in cash and zł21.2m in receivables that were due within 12 months. So it has liabilities totalling zł18.8m more than its cash and near-term receivables, combined.

Given Synektik Spólka Akcyjna has a market capitalization of zł245.6m, 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. Carrying virtually no net debt, Synektik Spólka Akcyjna has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Synektik Spólka Akcyjna has a low net debt to EBITDA ratio of only 0.21. And its EBIT covers its interest expense a whopping 19.6 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Synektik Spólka Akcyjna's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Synektik Spólka Akcyjna'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Synektik Spólka Akcyjna actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Synektik Spólka Akcyjna's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its EBIT growth rate has the opposite effect. We would also note that Healthcare Services industry companies like Synektik Spólka Akcyjna commonly do use debt without problems. Taking all this data into account, it seems to us that Synektik Spólka Akcyjna takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. For example, we've discovered 2 warning signs for Synektik Spólka Akcyjna that you should be aware of before investing here.

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. 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.
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