Synopsys (NASDAQ:SNPS) Seems To Use Debt Rather Sparingly
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 Synopsys, Inc. (NASDAQ:SNPS) 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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Synopsys
What Is Synopsys's Net Debt?
The image below, which you can click on for greater detail, shows that Synopsys had debt of US$22.0m at the end of July 2022, a reduction from US$107.2m over a year. But it also has US$1.53b in cash to offset that, meaning it has US$1.51b net cash.
A Look At Synopsys' Liabilities
Zooming in on the latest balance sheet data, we can see that Synopsys had liabilities of US$2.55b due within 12 months and liabilities of US$1.13b due beyond that. Offsetting these obligations, it had cash of US$1.53b as well as receivables valued at US$963.2m due within 12 months. So its liabilities total US$1.18b more than the combination of its cash and short-term receivables.
Since publicly traded Synopsys shares are worth a very impressive total of US$53.2b, it seems unlikely that this level of liabilities would be a major 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, Synopsys also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Synopsys grew its EBIT by 54% 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 ultimately the future profitability of the business will decide if Synopsys can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Synopsys has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Synopsys actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
We could understand if investors are concerned about Synopsys's liabilities, but we can be reassured by the fact it has has net cash of US$1.51b. The cherry on top was that in converted 143% of that EBIT to free cash flow, bringing in US$1.6b. So is Synopsys's debt a risk? It doesn't seem so to us. 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 example - Synopsys has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.
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