Is Synectics plc’s (AIM:SNX) Balance Sheet Strong Enough To Weather A Storm?
Investors are always looking for growth in small-cap stocks like Synectics plc (AIM:SNX), with a market cap of GBP £38.25M. However, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for SNX
Does SNX generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, SNX’s operating cash flow exceeded its debt obligations, which means SNX generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This is great news for both debtholders and shareholders, as the company exhibits cautious cash and debt management.
Can SNX pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? As cash flow from operation is hindered by adverse events, SNX may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that SNX is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Does SNX face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For SNX, the debt-to-equity ratio is 9.53%, which means debt is low and does not pose any significant threat to the company’s operations. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. In SNX’s case, its interest is excessively covered by its earnings as the ratio sits at 25.26x. Debtors may be willing to loan the company more money, giving SNX ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? SNX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In the future, SNX’s financial situation may change. I suggest keeping on top of market expectations for SNX’s future growth on our free analysis platform.
Are you a potential investor? Although SNX’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to also examine SNX’s track record. As a following step, you should take a look at SNX’s past performance analysis on our free platform to conclude on SNX’s financial health.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
