Is SYNergy ScienTech (TPE:6558) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that SYNergy ScienTech Corp. (TPE:6558) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SYNergy ScienTech

What Is SYNergy ScienTech's Net Debt?

As you can see below, at the end of September 2020, SYNergy ScienTech had NT$534.7m of debt, up from NT$143.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$697.7m in cash, so it actually has NT$163.0m net cash.

How Strong Is SYNergy ScienTech's Balance Sheet?

According to the last reported balance sheet, SYNergy ScienTech had liabilities of NT$602.3m due within 12 months, and liabilities of NT$527.8m due beyond 12 months. Offsetting this, it had NT$697.7m in cash and NT$566.9m in receivables that were due within 12 months. So it can boast NT$134.5m more liquid assets than total liabilities.

This surplus suggests that SYNergy ScienTech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, SYNergy ScienTech boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that SYNergy ScienTech's load is not too heavy, because its EBIT was down 60% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SYNergy ScienTech will need earnings to service that debt. 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. SYNergy ScienTech 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. Over the last three years, SYNergy ScienTech saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case SYNergy ScienTech has NT$163.0m in net cash and a decent-looking balance sheet. So while SYNergy ScienTech does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for SYNergy ScienTech you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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