Health Check: How Prudently Does Synchronoss Technologies (NASDAQ:SNCR) Use Debt?

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. As with many other companies Synchronoss Technologies, Inc. (NASDAQ:SNCR) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Synchronoss Technologies

What Is Synchronoss Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Synchronoss Technologies had US$133.1m of debt, an increase on US$10.0m, over one year. However, it does have US$31.5m in cash offsetting this, leading to net debt of about US$101.6m.

How Strong Is Synchronoss Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Synchronoss Technologies had liabilities of US$95.4m due within 12 months and liabilities of US$179.5m due beyond that. Offsetting these obligations, it had cash of US$31.5m as well as receivables valued at US$47.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$195.8m.

The deficiency here weighs heavily on the US$117.4m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Synchronoss Technologies would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Synchronoss Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Synchronoss Technologies made a loss at the EBIT level, and saw its revenue drop to US$281m, which is a fall of 3.8%. That's not what we would hope to see.

Caveat Emptor

Importantly, Synchronoss Technologies had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$13m. 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 burned through US$19m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Synchronoss Technologies (1 is concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.