Yahoo Finance SYZYGY (ETR:SYZ) Seems To Use Debt Quite Sensibly
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies SYZYGY AG (ETR:SYZ) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for SYZYGY
What Is SYZYGY's Net Debt?
You can click the graphic below for the historical numbers, but it shows that SYZYGY had €3.06m of debt in December 2019, down from €4.11m, one year before. But it also has €4.59m in cash to offset that, meaning it has €1.53m net cash.
How Strong Is SYZYGY's Balance Sheet?
According to the last reported balance sheet, SYZYGY had liabilities of €28.2m due within 12 months, and liabilities of €38.3m due beyond 12 months. On the other hand, it had cash of €4.59m and €20.5m worth of receivables due within a year. So its liabilities total €41.5m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since SYZYGY has a market capitalization of €77.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, SYZYGY boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for SYZYGY if management cannot prevent a repeat of the 23% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SYZYGY's ability to maintain a healthy balance sheet going forward. 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. SYZYGY 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. During the last three years, SYZYGY generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.
Summing up
While SYZYGY does have more liabilities than liquid assets, it also has net cash of €1.53m. And it impressed us with free cash flow of -€6.6m, being 83% of its EBIT. So we don't have any problem with SYZYGY's use of debt. 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 4 warning signs for SYZYGY that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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