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. Importantly, Synektik Spólka Akcyjna (WSE:SNT) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Synektik Spólka Akcyjna

How Much Debt Does Synektik Spólka Akcyjna Carry?

You can click the graphic below for the historical numbers, but it shows that Synektik Spólka Akcyjna had zł8.22m of debt in June 2021, down from zł10.6m, one year before. However, it does have zł13.4m in cash offsetting this, leading to net cash of zł5.17m.

How Strong Is Synektik Spólka Akcyjna's Balance Sheet?

We can see from the most recent balance sheet that Synektik Spólka Akcyjna had liabilities of zł33.9m falling due within a year, and liabilities of zł24.4m due beyond that. Offsetting this, it had zł13.4m in cash and zł20.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by zł24.6m.

Given Synektik Spólka Akcyjna has a market capitalization of zł272.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Synektik Spólka Akcyjna boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Synektik Spólka Akcyjna grew its EBIT at 18% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is Synektik Spólka Akcyjna's earnings that will influence how the balance sheet holds up in the future. 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. Synektik Spólka Akcyjna may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Synektik Spólka Akcyjna actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Synektik Spólka Akcyjna has zł5.17m in net cash. The cherry on top was that in converted 131% of that EBIT to free cash flow, bringing in zł17m. So we don't think Synektik Spólka Akcyjna's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Synektik Spólka Akcyjna that you should be aware of before investing here.

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.

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.

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