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Sykes Enterprises (NASDAQ:SYKE) Has A Rock Solid Balance Sheet

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Simply Wall St
·4 min read
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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 Sykes Enterprises, Incorporated (NASDAQ:SYKE) makes use of debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sykes Enterprises

What Is Sykes Enterprises's Net Debt?

As you can see below, Sykes Enterprises had US$7.00m of debt at September 2020, down from US$77.0m a year prior. However, its balance sheet shows it holds US$116.3m in cash, so it actually has US$109.3m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Sykes Enterprises' Balance Sheet?

According to the last reported balance sheet, Sykes Enterprises had liabilities of US$280.0m due within 12 months, and liabilities of US$192.3m due beyond 12 months. Offsetting this, it had US$116.3m in cash and US$396.4m in receivables that were due within 12 months. So it actually has US$40.4m more liquid assets than total liabilities.

This surplus suggests that Sykes Enterprises has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sykes Enterprises boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Sykes Enterprises grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Sykes Enterprises'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sykes Enterprises 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 most recent three years, Sykes Enterprises recorded free cash flow worth 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Sykes Enterprises has US$109.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 31% over the last year. So is Sykes Enterprises's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Sykes Enterprises .

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.

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. 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.

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