The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 S.C. Sinteza S.A. (BVB:STZ) makes use of debt. But the real question is whether this debt is making the company risky.
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 S.C. Sinteza
What Is S.C. Sinteza's Net Debt?
You can click the graphic below for the historical numbers, but it shows that S.C. Sinteza had RON6.21m of debt in September 2020, down from RON7.50m, one year before. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is S.C. Sinteza's Balance Sheet?
The latest balance sheet data shows that S.C. Sinteza had liabilities of RON13.5m due within a year, and liabilities of RON4.03m falling due after that. Offsetting this, it had RON45.9k in cash and RON971.6k in receivables that were due within 12 months. So its liabilities total RON16.5m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's RON16.1m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is S.C. Sinteza'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.
In the last year S.C. Sinteza had a loss before interest and tax, and actually shrunk its revenue by 25%, to RON19m. To be frank that doesn't bode well.
Caveat Emptor
Not only did S.C. Sinteza's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping RON7.2m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of RON3.2m over the last twelve months. That means it's on the risky side of things. 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. Case in point: We've spotted 4 warning signs for S.C. Sinteza you should be aware of, and 3 of them are significant.
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.
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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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About BVB:STZ
Slight with mediocre balance sheet.
