Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Synaptics Incorporated (NASDAQ:SYNA) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Synaptics's Net Debt?

As you can see below, Synaptics had US$974.7m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$848.7m in cash leading to net debt of about US$126.0m.

A Look At Synaptics' Liabilities

The latest balance sheet data shows that Synaptics had liabilities of US$253.3m due within a year, and liabilities of US$1.10b falling due after that. Offsetting these obligations, it had cash of US$848.7m as well as receivables valued at US$127.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$376.5m.

Of course, Synaptics has a market capitalization of US$3.67b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Synaptics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Synaptics had a loss before interest and tax, and actually shrunk its revenue by 41%, to US$1.0b. To be frank that doesn't bode well.

Caveat Emptor

While Synaptics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$48m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$78m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Synaptics you should know about.

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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