Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Synthesis Electronic Technology Co.,Ltd. (SZSE:300479) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Synthesis Electronic TechnologyLtd's Debt?

As you can see below, at the end of September 2024, Synthesis Electronic TechnologyLtd had CN¥72.9m of debt, up from CN¥59.9m a year ago. Click the image for more detail. But it also has CN¥261.1m in cash to offset that, meaning it has CN¥188.1m net cash.

How Healthy Is Synthesis Electronic TechnologyLtd's Balance Sheet?

According to the last reported balance sheet, Synthesis Electronic TechnologyLtd had liabilities of CN¥865.6m due within 12 months, and liabilities of CN¥25.1m due beyond 12 months. Offsetting this, it had CN¥261.1m in cash and CN¥308.5m in receivables that were due within 12 months. So its liabilities total CN¥321.2m more than the combination of its cash and short-term receivables.

Given Synthesis Electronic TechnologyLtd has a market capitalization of CN¥3.74b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Synthesis Electronic TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Synthesis Electronic TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Synthesis Electronic TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥301m. That's not what we would hope to see.

So How Risky Is Synthesis Electronic TechnologyLtd?

While Synthesis Electronic TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥4.9m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Case in point: We've spotted 2 warning signs for Synthesis Electronic TechnologyLtd you should be aware of, and 1 of them doesn't sit too well with us.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.