Does Synergis Holdings (HKG: 2340) have a healthy balance sheet?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Synergis Holdings Limited (HKG: 2340) uses debt in his business. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Synergis Holdings
What is the debt of Synergis Holdings?
You can click on the graph below for historical figures, but it shows that Synergis Holdings had a debt of HK $ 15.0 million in June 2021, up from HK $ 148.3 million a year earlier. But on the other hand, it also has a cash position of HK $ 122.6 million which leads to a net cash position of HK $ 107.6 million.
How strong is Synergis Holdings’ balance sheet?
We can see from the most recent balance sheet that Synergis Holdings had liabilities of HK $ 312.7 million due within one year, and debts of HK $ 6.61 million due beyond. On the other hand, he had HK $ 122.6 million in cash and HK $ 326.2 million in receivables due within one year. So he actually has HK $ 129.5 million Following liquid assets as total liabilities.
This excess liquidity suggests that Synergis Holdings’ balance sheet could take a hit, just as Homer Simpson’s head can take a hit. Given this fact, we believe its track record is as strong as an ox. In short, Synergis Holdings has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But it is the results of Synergis Holdings that will influence the performance of the balance sheet going forward. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, Synergis Holdings recorded a loss in EBIT and saw its revenue fall to HK $ 1.2 billion, a decrease of 14%. This is not what we hope to see.
So how risky is Synergis Holdings?
While Synergis Holdings lost money on earnings before interest and taxes (EBIT), it actually recorded a paper profit of HK $ 32 million. So taking this at face value, and given the money, we don’t think it’s very risky in the short term. There is no doubt that the next few years will be crucial for the maturation of the company. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 3 warning signs with Synergis Holdings and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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