These 4 Measures Indicate That Synektik Spólka Akcyjna (WSE:SNT) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Synektik Spólka Akcyjna (WSE:SNT) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 zł10.0m of debt in December 2020, down from zł11.6m, one year before. However, it does have zł22.5m in cash offsetting this, leading to net cash of zł12.5m.

How Strong Is Synektik Spólka Akcyjna's Balance Sheet?

The latest balance sheet data shows that Synektik Spólka Akcyjna had liabilities of zł34.4m due within a year, and liabilities of zł28.4m falling due after that. Offsetting this, it had zł22.5m in cash and zł20.1m in receivables that were due within 12 months. So its liabilities total zł20.2m more than the combination of its cash and short-term receivables.

Given Synektik Spólka Akcyjna has a market capitalization of zł303.6m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 125% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. During the last three years, Synektik Spólka Akcyjna generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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 zł12.5m. And it impressed us with free cash flow of zł11m, being 81% of its EBIT. 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. For instance, we've identified 1 warning sign for Synektik Spólka Akcyjna that you should be aware of.

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.

If you decide to trade Synektik Spólka Akcyjna, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.