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, Synektik Spólka Akcyjna (WSE:SNT) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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
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 zł9.02m at the end of June 2023, a reduction from zł17.0m over a year. But on the other hand it also has zł20.7m in cash, leading to a zł11.7m net cash position.
How Healthy Is Synektik Spólka Akcyjna's Balance Sheet?
We can see from the most recent balance sheet that Synektik Spólka Akcyjna had liabilities of zł91.8m falling due within a year, and liabilities of zł50.2m due beyond that. Offsetting these obligations, it had cash of zł20.7m as well as receivables valued at zł77.6m due within 12 months. So its liabilities total zł43.7m more than the combination of its cash and short-term receivables.
Of course, Synektik Spólka Akcyjna has a market capitalization of zł556.1m, so these liabilities are probably manageable. 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!
Even more impressive was the fact that Synektik Spólka Akcyjna grew its EBIT by 408% 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 it is future earnings, more than anything, that will determine Synektik Spólka Akcyjna'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Synektik Spólka Akcyjna produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
We could understand if investors are concerned about Synektik Spólka Akcyjna's liabilities, but we can be reassured by the fact it has has net cash of zł11.7m. And we liked the look of last year's 408% year-on-year EBIT growth. So we don't think Synektik Spólka Akcyjna's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Synektik Spólka Akcyjna's earnings per share history for free.
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.
About WSE:SNT
Synektik Spólka Akcyjna
Provides products, services, and IT solutions for surgery, diagnostic imaging, and nuclear medicine applications in Poland.
Outstanding track record with flawless balance sheet.