Synopsys (NASDAQ:SNPS) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Synopsys, Inc. (NASDAQ:SNPS) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Synopsys's Debt?

The image below, which you can click on for greater detail, shows that Synopsys had debt of US$14.2m at the end of January 2025, a reduction from US$17.0m over a year. But on the other hand it also has US$3.81b in cash, leading to a US$3.80b net cash position.

How Strong Is Synopsys' Balance Sheet?

The latest balance sheet data shows that Synopsys had liabilities of US$2.36b due within a year, and liabilities of US$1.38b falling due after that. On the other hand, it had cash of US$3.81b and US$1.72b worth of receivables due within a year. So it actually has US$1.80b more liquid assets than total liabilities.

This surplus suggests that Synopsys has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Synopsys has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for Synopsys

On the other hand, Synopsys saw its EBIT drop by 9.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Synopsys 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Synopsys 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, Synopsys actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Synopsys has net cash of US$3.80b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$1.3b, being 111% of its EBIT. So is Synopsys's debt a risk? It doesn't seem so to us. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Synopsys insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

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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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.