Is SYNergy ScienTech (TWSE:6558) A Risky Investment?

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.' 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. We can see that SYNergy ScienTech Corp. (TWSE:6558) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SYNergy ScienTech

What Is SYNergy ScienTech's Debt?

As you can see below, SYNergy ScienTech had NT$63.0m of debt at September 2024, down from NT$364.6m a year prior. However, its balance sheet shows it holds NT$428.2m in cash, so it actually has NT$365.2m net cash.

A Look At SYNergy ScienTech's Liabilities

Zooming in on the latest balance sheet data, we can see that SYNergy ScienTech had liabilities of NT$383.3m due within 12 months and liabilities of NT$11.2m due beyond that. Offsetting this, it had NT$428.2m in cash and NT$371.8m in receivables that were due within 12 months. So it actually has NT$405.5m more liquid assets than total liabilities.

This short term liquidity is a sign that SYNergy ScienTech could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SYNergy ScienTech boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is SYNergy ScienTech's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year SYNergy ScienTech's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is SYNergy ScienTech?

Although SYNergy ScienTech had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of NT$66m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for SYNergy ScienTech that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.